Paying Down Debt

Paying down debt is a smart financial move--no one ever misses the monthly payments or high interest rates that come along with every credit card. The trick is figuring out a way to pay down your debt that actually works for you.

Budgeting For Debt Reduction

Build a debt reduction plan that leads to success by beginning with a clear understanding of your financial resources and your debt load. It’s a good idea to put pencil to paper and build a budget that supports your financial goals.

Carefully list all of your outgoing expenses, and then add together your income. Adjust your expenses so that you have a budget that will support your goal to pay down your debt. It also helps to have an emergency savings account in place before you start, but don’t let it stop you if you don’t have one.

Once you have a clear idea of how much you can afford to direct toward your payoff efforts, take a closer look at your debt. Determine which of your debts carry high interest rates and which have low balances.

Paying Down Your Debts--What Are Your Options?

Talk to a financial adviser, and he or she will usually suggest one of two different ways to tackle and eliminate your debt load. Some experts suggest that you begin with your high interest rate debt first. Others suggest that you start with the lowest balance you owe. Both have pros and cons to consider.

The High Interest Option

If you love working with numbers and saving every cent, the best choice for you might be paying down the high interest debt first. Beginning with your most costly debt theoretically saves you the most money. If you are carrying high balances on your high interest debt, you will see significant savings as you reduce the balance.

Paying off high interest debt can be slow-going. At first, it may seem that very little progress is being made. A large chunk of your payment will be going to interest and if your balance is high, it will take a while to see the principle balance fall.

The Snowball Method

If you love seeing debt eradicated quickly and watching your efforts snowball, then choosing to pay off the lowest balance first might be best for you. The "snowball method" works because your ability to pay off debt grows as you eliminate the smaller balances, snowballing into greater and greater debt reduction.

The snow ball method works like this:

1. Payoff your lowest balance.
2. Determine the next lowest balance and combine the payment amount from your paid off debt with the payment you would make on this next lowest balance.
3. Pay off the next lowest balance.
4. Combine the payments from the two paid off debts and use this amount to pay down the next debt in line.
5. Continue combining resources until your debt is eliminated.

The down side of the snowball method is that your high interest debt might be at the back of your payoff-plan line, allowing the high interest debt to accumulate longer. This may cost you extra money in the long run.

Making It Happen

Once you select a method, finalize your budget and calendar your payments. Choosing to set up automatic payments will help you reach your goals and provide support when you feel your resolve weakening. Track your progress on a chart hung in a conspicuous place.

If a financial emergency throws a wrench into your well-laid plans, don’t give up. Even paying a dollar over your required monthly payment will advance your efforts to reduce your debt.

High interest or low balance, choose to begin paying down your debt today.