Debt paydown strategy?

[Barbmouse63]

What works best for you.....pay down least amount owed first or highest interest rate? I have read "expert" advice on both ways but wanted advice from Dis friends.

Has anyone read dave Ramsey's latest book? I think it's called Money Makeover or something to that affect. What do you think of it? Did you find it helpful?

 

[wdwpluto]

If you think you'll need that psychological boost to keep you on track, I'd suggest paying off the smallest debt first. Otherwise, I'd tackle the highest interest rate one first.

Fortunately for us, we owed the smallest amount at the highest interest, so it was the same order either way.

Don't forget to consider things like student loans, where the interest may be deductible.

 

[chefdeb]

We used Dave Ramsey's stratagies to pay off $27,000 in just under 2 years...we used the debt snowball theory and it worked! Whatever you decide to do, just do it and quick! The feeling of freedom and security that comes from working your way out of debt is priceless! We only owe on our house now and should have it paid off in 5 years. Yahoo!!! Grandma's way of thinking about money, pay cash and don't buy anything you can't afford, is the true way to financial freedom. Go for it!!

Oh yeah, I forgot...Total Money Makeover is a great book, but Financial Peace is even better. If you can find him, Dave is on the radio everyday plus you can listen to him via his website.

 

[Debbie Jean]

We used Dave Ramsey's stratagies to pay off $27,000 in just under 2 years...we used the debt snowball theory and it worked! Whatever you decide to do, just do it and quick! The feeling of freedom and security that comes from working your way out of debt is priceless! We only owe on our house now and should have it paid off in 5 years. Yahoo!!! Grandma's way of thinking about money, pay cash and don't buy anything you can't afford, is the true way to financial freedom. Go for it!!

Oh yeah, I forgot...Total Money Makeover is a great book, but Financial Peace is even better. If you can find him, Dave is on the radio everyday plus you can listen to him via his website.

Gotta ask.
What is the "debt snowball theory"? I can imagine that helping me get into debt but don't understand how it swould get me OUT of debt

 

[EthansMom]

Gotta ask.
What is the "debt snowball theory"? I can imagine that helping me get into debt but don't understand how it swould get me OUT of debt

Debbie Jean,

With the Snowball Method, you make extra payments towards particular debts and as those debts are paid off, you allocate all of the money you were paying to the paid-off debts to pay off the debts that are still left. Here's how you do it:

First, stop using credit cards or buying anything with debt. If you can't pay in full, you don't buy it.

Second, pay the minimum required each month on each debt.

Third, pay extra each month towards either your highest interest debt or your lowest balance debt. When that debt is paid in full, you take all of the money you were paying towards that debt each month and use it to pay extra towards either the next highest interest debt or the next lowest balance debt.

Say you have 3 debts, as follows:
$3000 @15%, min. $50
$5000 @10%, min. $200
$1000 @ 18%, min. $100
and you have an extra $100 you scrounge to help pay off your debt early.

You pay $200 toward the 18% debt each month, $50 toward the 15% debt, and $200 toward the 10% debt. The 18% debt would be paid in full in 6 months. You then pay $250 ($50+$200) toward the 15% debt and $200 toward the 10% debt each month. The 15% debt would be paid in full in another 12 months. Then you pay $450 ($200+$50+$200) each month toward the 10% debt. That debt would be paid in full in another 5 months. In less than two years you could pay off this $9000 of debt by only paying $100 more than your minimums (and not adding any additional debt).

My husband and I have paid off tens of thousands of dollars in debt in the last 5 years, using this method. In another year, we'll have paid off all of our debts except the mortgage.

I hope this helps!

 

[Debbie Jean]

Debbie Jean,

With the Snowball Method, you make extra payments towards particular debts and as those debts are paid off, you allocate all of the money you were paying to the paid-off debts to pay off the debts that are still left. Here's how you do it:

First, stop using credit cards or buying anything with debt. If you can't pay in full, you don't buy it.

Second, pay the minimum required each month on each debt.

Third, pay extra each month towards either your highest interest debt or your lowest balance debt. When that debt is paid in full, you take all of the money you were paying towards that debt each month and use it to pay extra towards either the next highest interest debt or the next lowest balance debt.

Say you have 3 debts, as follows:
$3000 @15%, min. $50
$5000 @10%, min. $200
$1000 @ 18%, min. $100
and you have an extra $100 you scrounge to help pay off your debt early.

You pay $200 toward the 18% debt each month, $50 toward the 15% debt, and $200 toward the 10% debt. The 18% debt would be paid in full in 6 months. You then pay $250 ($50+$200) toward the 15% debt and $200 toward the 10% debt each month. The 15% debt would be paid in full in another 12 months. Then you pay $450 ($200+$50+$200) each month toward the 10% debt. That debt would be paid in full in another 5 months. In less than two years you could pay off this $9000 of debt by only paying $100 more than your minimums (and not adding any additional debt).

My husband and I have paid off tens of thousands of dollars in debt in the last 5 years, using this method. In another year, we'll have paid off all of our debts except the mortgage.

I hope this helps!

That looks like a great system and makes so much sense. I like the fact that it's so well structured and really gives you the satisfaction of seeing the progress you are making

Thanks so much for posting in such detail. I'm going to sit down over the weekend and see if I can't put it into action. I'd love to get out from under my bills but know it will take discipline to do it

Congratulations on paying off all those debts! You should be so proud!

 

[EthansMom]

That looks like a great system and makes so much sense. I like the fact that it's so well structured and really gives you the satisfaction of seeing the progress you are making

Thanks so much for posting in such detail. I'm going to sit down over the weekend and see if I can't put it into action. I'd love to get out from under my bills but know it will take discipline to do it

Congratulations on paying off all those debts! You should be so proud!

I'm glad I could help!

I like using Excel to plot out amortization schedules that show how the extra payments pay off the debt faster. (Yes, I am a geek.)

Good luck with the debt repayment!

 

[seashoreCM]

When the interest or finance charges are computed directly based on the unpaid balance, the best strategy is to put all of the extra money you have available towards the highest interest rate debt.

Some loans have the total finance charge computed based on the time between the start of the loan and when the last (finishing) payment is made. These loans are sometimes called Rule of 78 or Sum of Digits loans. If you have several loans some of which are this kind, choosing which loan to pay off ahead of time is more difficult to compute. I would say that, if your highest interest loan is a Rule of 78 loan and the interest rate on the second highest rate loan is almost as high and that loan is not Rule of 78, pay off that second highest rate loan first. If you have just one loan and it is a Rule of 78 loan, make the minimum payments and put the extra money in a savings account. When the savings account has enough to finish off the loan in one lump sum, then finish off the loan.

Disney hints:
http://members.aol.com/ajaynejr/disney.htm

 

[JMSMommy]

We use Dave Ramsey's advice, and while it goes against the "pay the highest interest rate first" strategy, it has helped tremendously to keep us on track because the motivation it gives us when we pay something off is so high.

Enjoyed Financial Peace, and went through FPU. Listen to him lots...and still in debt but not as badly.

 

[FamilyGuy]

Are you really supposed to pay off debts.....

I thought they were just something you live with.....

No, but really, I think the answer to the op question would depend on the debtor. Some would be better motivated paying the smaller debt off first (even though it may have a lower rate). I think most would agree though it is better to pay off higher rate debt first, as this will yeild the best net result (interest savings).

I once was talking to someone about credit card debt and it was described as being the equivalent of financial cancer. That analogy plays true in many ways!

 

[Laurajean1014]

I'm doing the snowball now. I like to pay off the lowest amount first (more satisfying) and apply the monthly nut that I was paying to the next lowest amount. I am lucky, I only have two debts, but it is killing me that I am in debt.

Instead of paying down the second one, I am going to take out a loan to pay it off. I am careful with cc and are cutting back from 2 vacations to 1 a year.

It's a sacrafice I have to make!

 

[tinkerbell13]

We did the smallest balance first and payed off around 35,000 in around 3 years. For me it was the theory, that I am already paying the amount each month, so I needed a way to know I could do it, without having to pay extra at it. It was during this time, that we learned how to live without our credit cards, and after a while, we were able to put more towards the bigger ones.
I no longer "go shopping" unless I need something. For the first time in my married life(19 years), we are able to take a vacation every year. But I still do my best to get the best price

 

[ArielsMommy]

I do a modified version of snowball. I pay the minimum plus the finance charges to every card and pay that plus extra on the one with the lowest balances.

 

[ctinct]

One thing that has helped me is using the computer to make small extra payments whenever I can. If I budget a certain amount for groceries, but spend under that amount, I go right to the computer and send that extra amount in before I have a chance to spend it elsewhere. You do NOT need to have online banking to do this, because most credit card companies can process online payments through their sites.
Another strategy I have found useful is to make a payment every week, or every pay period at least if you are paid bi-weekly. Although it may not seem like much, it will help over time to reduce your interest charges and pay off your debt faster. Just be careful to make the minimum payment before the due date. Since many credit card companies have shortened their billing cycle, you may only have three weeks between the time you receive your bill and the time the minimum payment is due. Which reminds me of another thing I do---- I usually actually make my first partial payment of the month BEFORE I even get the bill in the mail, just by being aware of the closing date. I do NOT recommend going to paperless statements, although the credit card companies would love for you to do that, and they sure try to get you to do that once they see you are making e-payments. (It's much cheaper for THEM! ) I like to have a tangible reminder come in snail mail.
One more thing that has helped me stay motivated was mentioned by another poster. Print out a debt amortization schedule. In fact, print out several since it has been my experience that they all calculate somewhat differently. You can find these on financial sites like bankrate, Money and Kiplingers. I find it satisfying to compare my progress to these charts. Yes, I am also a dork! Still, it helps to see that the total going down faster than my charts indicate, just by making a few extra payments here and there....even $10 helps. Good luck to all of us struggling to become debt free!!!!!

 

[minnie1928]

One thing that has helped me is using the computer to make small extra payments whenever I can. If I budget a certain amount for groceries, but spend under that amount, I go right to the computer and send that extra amount in before I have a chance to spend it elsewhere. You do NOT need to have online banking to do this, because most credit card companies can process online payments through their sites.

I do this too and it works great! I did the Dave Ramsey FPU, read Financial Peace and got my DH in on it too. What we do now is since I get paid biweekly, we budget our $ and whatever is left in the checking account the night before I get paid again, I write out a check to the finance company holding my car loan. We're on target to have my car paid off 2.5 years early, then we'll hit my husband's car and pay that off about 3 years early. Then we'll attack my new DVC purchase. We've been doing this for about 4-5 months and paid off $5-6,000! The nice thing is that I don't feel like I'm having to do without because if I need something, odds are that I've been budgeting money for that category (ex: clothing) and the money is already set back waiting.

I hate paying interest, so we don't have CC debt, which is great. We use reward cards for things like gas, but pay them off each month. The car payments are big, so once we get rid of them I'll be CELEBRATING!

 

[FamilyGuy]

The car payments are big, so once we get rid of them I'll be CELEBRATING!

I wish I could keep my vehicles long enough to pay them off. Or, should I say pay them off quick enough to consider keeping them.
For a large portion of the populations nowadays, within a short time of getting them paid off they are ready to trade up (even though that may not be the best option).

 

[nuke]

I used to always want a new car. But now I am in the mindset of driving the car until it won't go anymore. Even if you put $1000 a year into it you are better off than having a car payment every month.

I've tried the snowball effect a few times. We have a plan going right now and the balances are coming down but I need to be more disiplined in my spending. When I get to that point we will be out of debt pretty quickly.

 

[MiraDawl]

I am so with you on the no car debt deal. My parents always taught me that there is no value in purchasing a car brand new, except to your ego. Granted, I love nice things, but I know each month I appreciate that extra bit of money more than I would a sparkling car in the driveway!

That being said, BF and I have been working for a while to get our debts paid off so we can buy our first home. We've been good about not using our credit cards, and sticking to cash if we need something.

 

[geetey]

Another Dave Ramsey supporter here! His debt snowball plan really does work!

 

[cobbler]

I paid off one of our debts this year. Due to some vehicle repairs I need to do (1500 - aak) it put me 2 months behind. With that I should have my last credit card bill paid off by the end of December and my student loans no later than March.