Many years ago, my wife and I got ourselves in trouble with credit cards. Trust me on this one, it’s very easy to do. We’ve spent a lot of time and effort (and tears and heartache) digging ourselves out of debt, and one of the ways we did it was by ignoring one of the nuggets of wisdom financial people seem to love to throw around. And that’s the idea that you should always pay off the loan with the highest interest rate first.
As a gamer, this is one of the arguments I’ve had with quite a few people, both in tabletop RPGs and MMORPGs. See, in these games, you’ll often have some really big bad guy (usually called a “boss monster” in geek speak) and that baddy will usually come with a bunch of minions (video-game geeks tend to call them “adds”). Traditional gamer wisdom holds that everyone should focus on Mr. Big and ignore the adds — the thinking being that once the boss is gone, you can then mop up the little guys at your leisure.
Now, this works in a lot of MMOs because boss monsters in video games tend to continually replace their supply of lost minions. It doesn’t make much sense to focus on killing them just to have them come back again in a few minutes, over and over and over. In cases like this, sure, you want to take the big guy out as fast as possible.
In most tabletop RPGs (and some video games and MMOs), however, the little guys are not replaced once they’re gone. In such cases, it makes more sense to wipe the little guys out before you tackle the big guy. They’re usually easier to take down, and by taking them down you’re eliminating a constant drain on your resources while you then tackle the largest target. Let’s say you have a boss monster and he has five minions. The boss monster can hit you for 25 points of damage each turn, and each minion can hit you for 5 points of damage each turn. That means that each turn, you’re taking a total of 50 points of damage. Now let’s say that it takes 10 turns to take the boss monster down, but only 1 turn to take each minion down. Using the traditional wisdom of focus on boss first, that means that you’ll spend 10 turns taking 50 points of damage each turn (for a total of 500 damage), followed by 1 turn where you take 25 points, 1 turn where you take 20, 1 where you take 15, 1 where you take 10, and 1 where you take 5. After 15 turns, all the bad guys are dead and you took 575 points of damage.
Going the other way, where you take out the minions first, means that you’ll still take 15 turns, but on the first turn you’ll take 50 points of damage, on the second turn you’ll only take 45 points of damage, 40 points on the third, 35 on the fourth, and 30 on the fifth. After that, all of the minions are dead and for the next 10 turns you’ll only be taking 25 points of damage each turn from the boss (for a total of 250 damage). By taking out the minions first, you’ve only taken 450 points of damage, instead of the 575 points of damage you would have taken had you ignored the little guys to focus exclusively on the big guy.
This theory applies to paying off bills, too: instead of focusing on the bill with the highest interest rate, start off by killing off the loans with the smallest amounts. That way, you won’t be taking damage from their interest rates in addition to the interest rate of your boss-monster loan. Plus, unlike with gaming, you can then take the payments you were making to those minion loans and add it to the payments to knock out the next one. When that one is gone, you can apply both of those payments to the next one, and so on.
In other words, let’s say you have one loan worth $10,000 and five smaller loans worth $500, and you can spend $100 a month on each of them. It will take you 5 months to wipe out the first small loan, but then you get to add the $100 payment you were making on that one to the $100 payment you’re making on the second. Which means it only takes you 2 more months to pay off the second ($100 for the first month plus $200 a month for 2 more months). Then you get to add those payments together for the third (which means you pay it off in 1 more month) and then to the fourth (paid off), and the fifth. So by the time you get those knocked out, you’ll now have $500 extra each month to send toward that monster loan. As a bonus, the only interest and fees you’ll be getting hit with from now on are from that one loan, instead of all six of them!
Granted, this is a very simplistic view that is further complicated in real life by interest rates and minimum payments and collected fees and all the other garbage banks love to do to keep their shareholders happy, but it’s what has worked to help my wife and I beat our boss monster and all of his minions!