Prioritizing debt

Three ways to organize—and pay down—your debt

Several years ago, my wife and I were going through our bills and trying to figure out what we owed to whom. The idea was to develop a payoff strategy, but it became a tad overwhelming. How should we organize it all? Who should we pay off first, and why? And how, in the name of all that is right and holy in this world, did we wind up with so much of it?!

Being the financial guru, I gave it some thought, did a bit of research, talked to some folks and finally came up with three ways we could do it.

By taking it easy

The Ease of Payment strategy would tackle our debt like the name implies: by ease of payoff (either the smallest payoff amount, or shortest term). Once one was done, we’d move to the next one, and so on.

The idea was to make some progress and see a relatively quick payoff for our efforts.

Looking long term

The long-term strategy would be easy to set up: Find the bill that costs the most over its lifetime (excluding our mortgage, thanks to the tax deduction on interest) and pay it first. Then we’d focus on the next costliest, and the next one, and the next …

The idea was for us to pay the least over the life of the debt, rather than worrying about month-to-month costs. Thus, our credit card would be the first on the list because minimum payments make such a small dent in the bill. 

  • If we had $1,000 at the average of 17% interest, it’d take us nearly seven years to pay, with $500 in interest.
  • A $5,000 card at the same rate would take 12 years to pay and cost $2,665 dollars in interest.

So we went to a financial calculator and added up ours. It might have had a lower rate and less on it, but it still would have taken us six years of making minimum payments to pay it off. It was quite the eye opener.

Interested in interest rates

The Interest-Rate Strategy was straightforward: We’d take all of our bills and order them by their interest rate, with the highest as the top priority, then the next highest, and so on. The goal was to pay the smallest amount in interest and save ourselves a ton of extra money.

Which one we chose

Because we could easily change strategies as our financial situation changed, we started with the first one—Ease of Payoff—so we could have some breathing room. A few months and paid bills later, we moved to the long-term strategy.

Although the Interest Rate Strategy would have saved us the most over the long haul, it didn’t fit with our budget. And you know what? That’s okay! Sometimes the real world intrudes, and choices aren’t viable. The key was that we were doing something to get a hold and control of all of our debt.

Oh, and one thing we did that can also help you is “The Snowball Technique.” Once we paid off a bill, we added that money to the payment of another one. For example, the $100/month we used for our credit card was added to our car payment. Once that was paid, we added the money we were using on those to another payment, and so on. It’s a fantastic way to pay off a lot of debt in a short amount of time.

So if your debt is becoming too much to handle, try one of these strategies. Odds are you'll feel much more in control and have a real plan to reduce your debt.

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Mark Dye

About the author: Mark Dye

Mark Dye has been writing articles, recording podcasts, and putting together books on personal finance for nearly a decade. His work has been recognized by the American Bankers Association and the Institute for Financial Literacy, and received an 2011 APEX Grand Award for Writing. Follow Mark on Google+.

Contact: Mark Dye


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