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Five Steps to Getting and Staying Out of Debt (Step 3)

By Erik Folgate

Step #3:  List your debts smallest to largest, and start aggressively paying off the smallest debt, and working your way up to the largest debt. 

This method of debt elimination is contrary to how many people believe that debt should be paid off.  The most popular way to set up a debt elimination program is by listing the debts from smallest interest rate to largest interest rate and then paying off the smallest rate first.  First, I will explain the method that I use, and then I will show you why I disagree with the smallest to largest interest rate method. 

Let’s say you have five debts and they range from $500 dollars to $10,000.  If you listed them from smallest to largest, it could look like this:

Debt                Amount You Owe            Monthly Payment

1. Crecit Card         $500                               $30

2. Credit Card         $1000                             $60

3. Medical Bill          $2,500                            $150

4. Car Loan            $5,000                            $200

5. Student Loan     $10,000                           $250

——————————————————–

Total                     $19,000                           $690

Step #2 was creating a written budget for a reason.  It is impossible to implement step #3 effectively without knowing how much extra money you are able to put towards debt each month.  For the sake of simplicity, we will say that you have $300 per month to put towards debt.  In two months, you can knock out your first debt on the list!  Wow, that was easy!  The mental aspect of this method is the most important part, because it builds up momentum and helps you believe that getting rid of your debts quickly is possible!  Then, you take that $30 monthly payment that you were paying on the credit card, and add it to the $300, so now you have $330 to pay towards debt.  You will then have the $1000 credit card paid off in 3 more months!  Take that $60 monthly payment and put it towards your debt payment amount to make $390 to put towards paying off debt.   You will have the medical bill paid off in about 5 months if you factor in the previous 5 months that you had been paying the minimum payment on it.  Then, apply that $150 to your debt payment amount to make it $540.  You will have that car payment paid off in about 9 months!  Finally, you will have about $750 a month to start paying off your largest debt, the student loan.  By this time, you may have found other ways to increase your income, and knowing that you only have one debt to pay off can be a very motivating thing! 

Do you see the progress in this method?  It is a plan tha caters to someone who has the mentaily that debt never goes away.  It is so discouraging to spread out your money and pay off a little at a time on each debt.  Those debts will seem like they stick around forever!  The main reason that I do not endorse the highest interest rate debt first method is because there is a possibility that your highest interest rate debt could be $10,000.  If you are trying to pay off your largest debt first, it will feel like a daunting task and you will never gain any momentum.  Plus, you will have a bunch of small debts pestering you like flies.  It makes sense to clean up those little debts before you start attacking the big ones.  Plus, you will free up more of your income to pay off the larger debts if you clean up the smaller ones first. 

If you are totally dedicated to getting out of debt, you do not need to worry about your interest rates.  You will be paying them off so quickly using the method that I described above that the interest rate will not kill you.  However, if you have 5 or 6 credit cards that you need to pay off and some of them are at a ridiculous rate like 20 – 25%, then by all means, do a balance transfer to a card with a lower rate or open a new account with a low promotional rate so that you can have some relief while you are paying off other debts.   

Erik Folgate
Erik and his wife, Lindzee, live in Orlando, Florida with a baby boy on the way. Erik works as an account manager for a marketing company, and considers counseling friends, family and the readers of Money Crashers his personal ministry to others. Erik became passionate about personal finance and helping others make wise financial decisions after racking up over $20k in credit card and student loan debt within the first two years of college.

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  • http://1pieceatatime.blogspot.com Mountain Girl

    I understand your method and was doing the same thing myself until I found out that to improve your credit scores, it is better to spread out your push payment plan. Apparently, if you think you might need a mortgage soon, it’s better to have four or five cards at 50% or less of the credit limit rather than a mix of zero-balance and high-balance cards.

    But the rules seem to change every day, so who knows ;)

  • Bovoa silas

    i am so happy for this method you just put into my brain, i will use it and will feed you with a good news how i over come my debt. thanks God bless you and your family. from nigeria silas p. bovoa.

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