conversation: User (blackhawk767): "I am a little confused about the best debt pay down strategy is. From what I read, there is really little difference, but I just want to make sure of this point:\n\nSay you have one balance at a high interest rate, but say the balance is low (such as 1000 at 6%) and another debt with a much higher balance and lower interest rate, (14000 at 3.5%).\n\nIn this case, lowest balance (snowball) and highest interest (avalanche) would both say pay the first debt. However, is there a case you would pay down the second one first, since the amount of interest on such a high balance accrues in a much larger amount? \n\nIf the balances are roughly the same with different interest rates, I can see how the strategy comes into play. However with such unequal balances I feel like a much larger balance, even with a low interest rate, could actually surpass a low balance/high interest rate accrual. \n\nI would like clarification because I am having a hard time figuring out how to work it out myself. Side note, if I were to practice this in excel or mathematically by hand, what formulas do I use? I have a hard time understanding compound interest (daily vs APY). Like is a rate is 3.5% compounded daily, what does that mean?"
  Self: "Mathematically, it is ALWAYS better to pay off a higher-interest debt first. There is no debate on this. However, a lot of people like the snowball method because it makes them FEEL better and gives them more motivation to pay off all of their loans. Motivation is a huge factor in paying off debts, but paying off higher debts first will save you more money and cut out your total debt faster. Albeit, the difference may be small.\n\nMost debts that you take out from financial institutions are compounded daily (while debts that financial institutions owe you compound much slower. Sucks, huh?). Easy formula for excel:\n\nColumn A: dates, daily\n\nColumn B: loan amount\n\nColumn C: payments\n\nCell B1: original loan amount\n\nCell B2: =B1*(1+interest rate/365) - C1\n\nCell B3: =B2*(1+interest rate/365) - C2\n\nDrag those B cells down until the loan payment is zero. Copy these cells for each loan that you have and experiment on which loan gets paid off faster and how much total loan amount you have. You will see that making payments on the higher one will reduce total loan amount faster.\n\nEDIT: interest rate is the percentage divided by 100. 3.5%=0.035, 6%=0.06. And I messed up the formula."
  