People who have been living with major debt may have a hard time facing the reality of their financial situation. They may not want to get organized because it would mean they have to look through their financial life piece by piece and actually see how much debt they have accumulated. It’s not an easy thing to do and it’s certainly not fun to tackle that debt. But it must be tackled.

It really won’t do anyone much good to try to better their financial life without dealing with the debt they may have. And there are many ways out there to deal with paying down debt.  Each way has its pros and cons, but if you do like one over the other, stick to it! The plan we like is the debt rollup (otherwise know as debt snowball). It’s simple and will allow you to tackle debt one at a time until they’re all wiped out (though you will pay more in interest over the long run).

The strategy is as follows:

  • Pay off the smallest debt that can be repaid in the shortest period of time first (based on the balance and the minimum payment). This will then provide additional cash that can be used to pay down other debt.
  • If more then one debt can be paid off in the same number of months, pay off the debt that has the highest interest rate first.
  • All other factors being the same, it is better to pay off debts with deductible interest, such as mortgage and home equity lines last.

Simply put: pay off the smallest balance first. Starting out, for each debt you have, pay the minimum balance. For the debt with the smallest balance, decide on an additional amount you can afford to pay monthly. Since hopefully you’ve already reviewed your cash flow, you should be able to decide on that dollar amount easily. Or, if you have been paying over the minimum on any of the debts, combine that extra amount and apply it toward the smallest debt. And don’t be discouraged!  Even if it’s only $5 extra a month, you’ll still be making progress. In the meantime, try and work down some of your expenses to increase that number later.

After the first balance is paid off, you have all that monthly payment to apply to the next debt’s minimum monthly payment. And you start again.

Below is a chart of a simple debt roll up.  Included in this example is the mortgage. You may or may not choose to pay off your mortgage early; there are legitimate cases for both sides, but for the purpose of showing this strategy, we’ll include it.

The key here is never to give up. This method will work, no matter how much debt you have. However, for it to work, it is very important to not create new debt!