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Quick qstn - I'm receiving HRA of 24075 from my employer but I would like dhow the rent paid as 96k p.a (while filing ITR). Even if I do so, I was only able to get exemption of 24075 from gross. Checking if we can speak to payroll department to increase Actual HRA since I'm actually paying more rent than compared. Will I be able to do so ?Deloitte Newco EY Accenture Genpact KPMG
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Whichever helps you pay it down more quickly. I’d argue to pay the higher interest one and then immediately roll that payment towards the other loan.
The way things work logically, can be different from how they work psychologically.
Not quite. Imagine you had 8k to pay down loans immediately. If you put to #1, you would avoid $488 of interest a year. If you put to #2, you’d avoid $568 of interest a year. Higher interest is mathematically better. BUT the points about momentum and building confidence / getting wins is also important. Slightly less “efficient”, but maybe better from a psychological standpoint
I think it depends on the person. Harvard actually released a study discussing how the average person is better of paying down their lower amount first to build momentum. in your case it's the same #2
SM1 - There are many methods out there. What Harvard did was look at outcomes using large datasets
https://hbr.org/2016/12/research-the-best-strategy-for-paying-off-credit-card-debt
As ATK1 pointed out, don’t discount the psychological benefits. From a pure numbers perspective, you’re better off paying off the higher interest rate first - you’ll end up paying less in interest.
Higher interest first = debt avalanche method (do this if you want to pay less interest overall)
Higher balance first = debt snowball method (do this is it’ll help you sleep more soundly or you think you won’t follow through if you don’t tackle the biggest chunk first)
$ is fungible so treat it as one big loan balance with parts of it being more expensive (higher interest) than others (lower interest). The sooner you pay off the higher interest loan, the sooner you get rid of your more expensive debt.
Balance * interest does matter, in the sense that if you could pay off the entirety of the larger loan, that would save you more in future than paying off the entirety of the smaller loan. But that’s kind of a false choice, because if you had $16k available to do that, you would save *even more* by first paying 8k to wipe out the smaller (higher interest) loan, and then paying 8k to pay down half of the lower-rate, 16k loan.
Think of this way:
If you pay $100 in month A, you don't accrue interest on that $100. Would you rather accrue on the high or low interest loan? Consider what you pay, not what's still out there
...but I don’t understand why I wouldn’t pay more to loan 1 in this scenario. Scenario being paying off student loans, I have my mandatory min payments which I can’t control but I can apply overpayment to specific loans
So I don’t know if I’m misunderstanding the math, but the interest is compounding faster on loan 1, so wouldn’t it make sense to apply overpayment to whichever loan is the highest (balance x interest)? To clarify, I have 4 loans, one for each year of college, but it’s all lumped together in one min payment with Discover Student Loans, but I can choose which loan to apply overpayment
Short answer is that, yes, you may be misunderstanding the math. If the interest is compounded the same for each loan (likely), then highest interest rate first will save you a few bucks in total interest.
More detailed example here:
https://www.forbes.com/sites/robertberger/2017/07/20/debt-snowball-versus-debt-avalanche-what-the-academic-research-shows/
Interest is not compounding faster on the first one. If you have a fixed X dollars you can spare each month toward paying it down (eg $100), then paying it towards the higher rate loan immediately saves you $7.10/12 ~= $0.60 in interest the next month, while paying that same amount toward the lower rate loan is only saving you $6.10/12 ~= $0.50 in interest the next month. Those monthly savings look small but of course keep adding up every month - and the key point is it’s a larger savings if you pay it toward the higher rate.
Ok, so I kind of understand what you’re saying, if I overpay the 7.1% loan, there is $100 less dollars I have to pay interest on. But why does (balance x interest) not matter? I guess my issue is I don’t understand how the interest compounds?
The issue is that the balance you can afford to pay off right now is presumably a fixed amount. And it’s that balance times the interest that matters. The total balance of any given debt is irrelevant to its place in the hierarchy of payments.