How to Pay Off Debt in Three Steps

This is a simple three-step guide to paying off debts based on your financial personality.

Instructions

1

Make a list of all of your debts, including the name, balance, minimum payment amount, and interest rate.

2

If meeting small, incremental goals or milestones keeps you motivated, divide each balance by the minimum payment, then sort the list from the lowest result to the highest. If you are good at keeping your eyes on the prize no matter how far off it seems, sort the list from highest interest rate to the lowest.

The first method will cost more in the long run, but gives you an almost immediate sense of accomplishment and momentum since it knocks out accounts quicker. The second method saves you the most money in the long run, but since the focus is on the most expensive debt, not the fastest to pay off, it may feel like its taking a while to get anywhere.

3

Take the first debt on your list, and for every month until its paid off, pay the minimum due plus anything else you can afford to put towards it. Just pay the minimum on all of the other debts. When the first debt is paid off, take the amount you were paying on it (the minimum + the extra you could afford), and add it to the minimum balance for the next debt on the list. Pay this new amount on the second debt until it is paid off, continuing to just pay the minimum on all other debts. Lather, Rinse, Repeat. Do this for all of your debts until everything is paid off.