So I’ve been reading a lot of blogs and articles about approaches in paying down debt – there are several different programs being championed out there and I’m interested to know what yours is. Here are a few of the most prominent in my life.
Dave Ramsey – The Debt Snowball
I’m not a “Dave Ramesian,” so I may not be 100% on the details of this approach, but my understanding is that you list out all of your debts and the minimum payments on each. You then aggressively pay down the debt that is the smallest, using any additional funds that you can from your budget. When that debt is paid off, you put that payment toward the next smallest debt, along with its minimum payment, until that is paid off. Wash. Rinse. Repeat.
Suze Orman – Highest Interest First
Suze’s approach is slightly different – she also wants you to list out all of your debts and the minimum payments on each, along with the interest rate. You then aggressively pay down the debt that has the highest interest rate, using any additional funds that you can from your budget. When that debt is paid off, you put that payment toward the next highest interest rate, along with its minimum payment, until that is paid off. Say it with me “Wash. Rinse. Repeat.”
My Microsoft Money program set up a debt reduction plan for me after I entered all of our obligations and targeted what amount we could pay above the minimums. It targets the highest interest rate first, also. We had 6 months of extra big debt payments (see Success), so I wasn’t sure that it was calculating everything correctly, but as I looked down the road at the total payments in 2009 and 2010, it showed that as we paid off out debts, Money would not apply that “left over” money to the next debt in line. It was really confusing to me for a time, until I realized that it was trying to help me build a reserve in my checking account. When we have about $5,000 in reserve, it tapers off and then starts applying the full amount towards the minimum payments, along with the extra that I said I could pay. At first, I thought that I should take the $5,000 and get us out of debt 3 months earlier. But then I realized that this is a great way to build up our emergency fund and that in a 3+ year plan, getting out 3 months earlier would feel great, but wouldn’t be any protection in an emergency, as we have closed the majority of our credit card accounts.
So, I’m comfortable with the Microsoft Money plan for now – I’m looking forward to having the emergency money and staying on track with the plan.
What is your preferred plan?