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Over many, many months of looking at every experts different ways of debt reduction and elimination I’ve come to the conclusion that the following is the method that would/should work best.

In order for this to work, there are two things that we must commit to.

  1. We must stop using our debt instruments completely. One extra purchase sets us back by months.
  2. We must be willing to have several tight months.

Here’s what we do.

  1. Make a list of all your debt with the balances and interest rates. (I’ve found that a sortable spreadsheet works quite well for this.)
  2. Sort that list by either Highest Interest rate first or by highest balance. (You might find it reassuring to slip a lower balance item in to the top of the list for gratification purposes when you get rid of it)
  3. Using your list as a guideline, begin paying as much as you can on the debt at the top of the list and $1 more than minimum on the rest of the list items.
  4. At some point the item at the top of the list will be paid off. Remove it from the list and add the payment you were making to it to the payment of the next one on the list. This will create a “payment snowball” effect.

Here is an example. I have three credit cards, each with a $1000 balance. The Interest rates are 8%, 9% and 15%. I list them in highest interest rate first. My list looks like so:

  • $1000 15%
  • $1000 9%
  • $1000 8%

Nest I add the minimum payments to the list:

  • $1000 15% $57
  • $1000 9% $54
  • $1000 8% $51

My initial payments to the 8% and 9% items are going to be $52 and $55. My budget allows for me to make payments of $120 to the 15% item.

As the 15% item gets paid off, I roll that $120 payment onto the payment for the 9% item. My payments are now $174 on the 9% item and still $52 on the 8% item.

When the next item gets paid off, I simply add the payment from it to the next item on the list. You can easily see how, if the list were 6-7 items long and my high payment begins at $100-$120, it quickly adds up on the next items until I’m making payments of several hundred dollars on the last item and it gets paid off very quickly.

This does work. It works well. The biggest thing is to remember that you must stop using your debt instruments and you must keep with the program. You must also remember that even though you racked up the debt in 6 months, it’s going to take quite a bit more than that to pay it off. A strong will is necessary in paying your debt off.

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