I would disregard both calculating MTR and considering MTR in debt repayment.

Too many assumptions about tax brackets, itemization, etc.

Keep things simple. DR snowball method works best. Lowest balance to highest balance. Keeps the incentive to pay it all off the fastest.

The faster you pay off the debt (which is controlled by emotion) the less the interest rates on that debt matter.

Dave knows

Please continue showing folks how to translate stated rates of interest into effective rates. We all should have been taught how to do this in high school — first in Algebra 1 and a second time in the first year of calculus, preferrably just after that horrible proof (theta and the word “marginal” come to mind but the rest is a blur) almost soured us on math forever. 1-mtr has the capacity to cut through an enormous amount of confusion and salesmanship. The world would definitely be a better place if more of us reflexively applied the formula to any tax-favored idea dangled in front of us.

And please be careful. 1-mtr is a beautiful thing and you have stumbled over the most basic steps and sullied her. Her really devious tricks come into play when tax brackets are straddled, phase-outs apply, or when there are limits on the amount that can be deducted or the size of credits, none of which appear to apply here. You should not be stumbling over such elementary things as the deductibility of second mortgages and HELOCs and the income-sensitive nature of the student loan interest deduction.

We’ve come to expect better.

His rationale isn’t based on the mathematics–it’s based on what happens to people emotionally. As you pay off debts, you get to scratch off the small ones more quickly, and start seeing debt balances go down by larger amounts sooner. These faster “attaboy”’s are encouraging and helps you see the progress you’re making, and raises your chances of becoming debt free.

Contrast that with paying off the largest, highest interest rate debt first–you see it go down but it seems S-L-O-W. Since you’re still making minimum payments on all the debts, your extra payment on the larger one is smaller than if you knocked them out smallest to largerst. The higher interest rate makes it seem like you’re gaining very little ground as you try to chip away at it–you take some away, and the interest puts some back, and again it’s the largest debt so it seems like you’re losing the most ground.

This makes the “finish line” seem very far away, and makes the pile of debt seem much larger. It’s much easier in that scenario to get discouraged and give up, even if mathematically you’re making better progress by paying off a higher interest rate debt.

I’m a huge fan of 1-mtr. It’s simple and it cuts through an amazing amount of deduction-worship. Unfortunately, you have to understand a thing or two about the tax code in order to use it. The HELOC is probably deductible. The 28% bracket and student loan interest combo is impossible. You start losing the student loan interest deduction long before you reach that bracket. There are also state and local taxes to consider with the student loan interest deduction and the return from a savings account.

Bad day, eh? We all have those.

The emergency fund is a good idea regardless of the payoff tactics used.