When using the Debt Snowball in Baby Step 2 of the Baby Steps Tracker, your debts are automatically organized using the debt snowball method.
Normally, this means your debts are listed from smallest balance to largest balance. However, there's one important exception: IRS debt.
Why Is My IRS Debt Listed First?
If your first debt isn't your smallest, it's likely categorized as IRS debt.
We recommend prioritizing IRS debt because:
- High interest and penalties: IRS debt can accumulate significant interest and penalties.
- Collection authority: The IRS has extensive authority to collect unpaid taxes.
Because of these factors, IRS debt is placed at the top of your debt snowball, even if the balance is larger than your other debts.
How Does This Affect My Debt Snowball?
The debt snowball method typically focuses on paying off debts from smallest to largest, regardless of interest rate.
IRS debt is one of the few exceptions to this rule. Once your IRS debt is paid off, you can continue working through your remaining debts from smallest to largest.
To learn more, check out Top 5 Debt Snowball Questions Answered.