Paying Off Debt
It's Quite Simple Really...

I'm going to show you a method for paying off debt that is simple, but not easy (no debt reduction method is). The method is proven and powerful, but it requires your effort to make it work. And it will work if you work it.

Does paying off your debts in just a third of the time it would normally take you sound interesting? Does saving thousands of dollars in interest charges on top of that appeal to you? If the answer to both those questions is a big yes, then let's get started.

Of all your options for paying off debt,

this method should be the first one that you consider.

It's ethical, legal and can cut the time it will take to get you out of debt significantly. What's the name of this "magical method"? Well, it goes by a few different names, like the debt snowball, the debt roll up and the debt roll down. And although there are subtle differences to each, at the their core, they are all very similar and effective in erasing credit card debt and other debts (both secured and unsecured).

Here is the premise if you will.

The basic idea is that you pay more than the minimum monthly payment on one of your debts, while you pay just the minimums (in order to stay current) on your other debts. Once the first debt is paid off, the money that you had been using to pay that debt is then "rolled-up", rolled-down" or "snowballed" into paying down the next debt on your list. And so on, and so on, until, voilà, you are debt free.

Sound too simple? Well, let's take a look at exactly why and how this method works, and more importantly, why it will work for you. I'll compare the different ways of prioritizing your debts as well, and provide you with some options in that department. But before I do that, let's find out if you are a good "candidate" for this method of paying off debt.

Who Is This Debt Reduction Method Appropriate For?

Are you struggling just to make the monthly minimum payments on your debts? Are you late with payments on occasion and/or do you miss some payments altogether? If this sounds like your situation, then this method may not be right for you. But don't rule it out just yet. It's too soon for that. Because no matter what your current financial situation looks like, if your goal is paying off debt, then you need a budget. You will be amazed how much extra 'debt paying money' you can come up with each month just by setting a budget for you and/or your family.

And it doesn't matter what your income level is either. Whether you make $20,000, $50,000 or $100,000, if you want to get out of debt, the single most important thing you can do is create and stick to a budget. And if you do that, the method we are discussing here will perform for you like it is on steroids! Read more about creating a debt payment plan by combining a budget and a repayment schedule here. (opens a new window)

Why This Method Works For Paying Off Debt

This method works based on both "the math" and "the emotion" involved. It works because it provides you with laser like focus and breaks down the overwhelming thought of paying off all of your debt, into bite sized achievable goals. Let's look at an example of why this debt pay down method works "in general" and then we will compare the different ways of ordering your debts.

Let's say you had two credit cards with outstanding balances on each. The first card has a balance of $3,000, an interest rate of 22%, and a minimum monthly payment equal to 2% of the outstanding balance each month ($60). The second credit card has a balance of $5,000, an interest rate of 17% and a minimum monthly payment equal to 2% of the outstanding balance each month ($100).

Here are four options you can use for paying off debt on these credit cards:

Option #1: Pay just the minimum payment amounts each month. If you do this it will take you 66 years and $23,736 in interest charges to pay off the first card (with the $3,000 balance) and 30 years and $10,467 in interest charges to pay off the other card. Total time spent paying off debt is 66 years and total interest charges are $34,203. Not a very appealing option is it?

Option #2: Pay an amount equal to the current minimum payment amount on each card, for each month going forward. In other words, continue to pay $60 on the first card and $100 on the second, month after month, until the balances are zero. The result? Using this method the first card would take you 11 years to pay off and cost you $5,207 in interest charges. The second credit card with the $5,000 balance would take you 7 years and $3,760 in interest charges to pay off. Total time spent paying off debt is 11 years and total interest charges are $8,967. Still not "appealing", but better.

Options #3 and #4 (below) require you to pay above and beyond the minimum requirements on your debts each month. For this example we will assume that you will be paying an additional $80 each month.

Option #3: For this option you will split the extra $80 proportionately between the two debts, adding $30 to the payment amount on card #1 (for a total of $90), and $50 to the payment of card #2 (for a total of $150) each month. The result? Using this method it would take you 52 months and cost you $1,679 in interest charges before the first card was paid off. The second card would take you 46 months and cost you $1,814 in interest charges to get the balance to zero. Overall this option would take you 52 months and cost you $3,493 in interest. When it comes to paying off debt, option #3 is certainly looking the best so far. But let's look at one more option.

Option #4: Instead of splitting the extra $80 between the two credit card payments, let's instead apply the entire $80 to the payment of the first card, while maintaining a $100 payment on card two. Once card number one is paid off, then we will snowball, roll-up or roll-down (whatever you choose to call it) the $140 you were paying towards the first card, and put it towards the second card each month. The result? Using this method of paying of debt, the first credit card would be paid off in just 28 months with $845 in interest charges. After these 28 months, the $140 is now added to the payment amount on the second card. In just 20 more months and with total interest charges of $2,403, the second credit card will be paid off. The totals look like this. Total time to pay off the credit cards, 48 months. Total interest charges, $3,248.

Summary of options for paying off debt:

Option #
Interest Charges
66 years
11 years
52 months
48 months