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Reducing Debt – Where Did We Start?


I’ve been receiving some comments and emails asking where do you start when it comes to reducing debt so I thought I would write a post telling what we did.

First things first, we calculated the total damage. This is a sobering step, but once you finish it you have a better idea of where you stand. We listed all of our debts with columns for creditor, balance due, interest rate and minimum monthly payment. This can be done on the computer or with pencil and paper.

I also took a look at how much we were paying for finance charges. When I first started this blog, we were paying over $400/month in finance charges. That was $400 a month that we could have for other things in life if we didn’t have our credit cards. I used that as motivation.

Once you have all of your debts listed, there are two popular ways to start paying them off.

1.) List your debts from the highest interest rate to the lowest interest rate. Pay the minimum payment for all debts except for the one with the highest interest rate. That debt you pay as much as you can towards. Once that debt with the highest interest rate is paid off, you tackle the next debt in the list.

2.) List your debts from the smallest to the largest balance. Pay the minimum payment for all debts except for the one with the smallest balance. Pay as much as you can to that debt. Once that debt with the lowest balance is paid off, you takle the next debt in the list.

If you choose to go with #1, you will end up paying less interest in the long run because you are getting rid of the balances with the higher rates first. But sometimes the balance with the highest interest may be your largest balance. It may seem like its taking forever to get it paid off.

That’s the appeal of #2. By paying off the smaller balances first, you are seeing progress quickly by paying off entire balances. That can be a big boost to your self-esteem with your debt reduction plan.

For us, we are doing a combination of the two. For the most part, we have been tackling the debt with the highest rates but we have paid off other debts first. I think the main thing is to decide on a plan that works for you and you stick with it. Committment to becoming debt-free is a big factor. Without that, both of the plans above will not work.

I’ll talk about where my motivation comes from in a later post. I started making a list, and I am amazed where all I am pulling inspiration/motivation from.


  • Reply Sara |

    The difference in interest paid between #1 and #2 is minimal. The amount of time it takes to pay off your debt is one to two months shorter with #1. (There have been studies done on this!) But with #2, you get the ssatisfaction and MOTIVATION of seeing your debts disappear!

  • Reply Poorer Than You |

    If there’s an interest in improving your credit as well, I recommend adding $1 to the minimum payment for each debt, especially credit cards. If you just pay the minimum every month, that will show up on your credit report. However, if you pay even $1 more than the minimum, it will just show up as a payment, instead of “minimum payment.”

  • Reply Leanne |

    Adding up all your debt and seeing that total glaring at you certainly is an eyeopener. I know when I did that and realized that as single woman with one income and debt higher than my salary, I wanted to crawl into a hole. I look forward to hearing where you get your motivation from. I paid all of mine off and it feels great! Great post!

  • Reply NCN |

    Yes! Great post. Getting started is ALL about recognizing where you ARE and creating a plan for where you want to BE. NCN

  • Reply kris |

    Until last September I was plodding along in a Debt Management Program that was scheduled to continue through Feb 2008. Not sure why-probably my 50th birthday-I got motivated to to do something about it.
    Turns out that the DMP was structured to pay the highest interest, highest balance cards the longest. Think long and hard before entering a DMP!
    As of Feb 15th, I was able to knock down the remaining 7,200 bucks. Once I realized how out of whack the DMP plan was, I called them up and rearranged payments as best I could(given certain minimum DMP payments to creditors) to a combination of the Ramsey method (pay off lowest balance) and the more efficient pay off highest interest method.
    A bit of luck in the opportunity to work all the overtime I could stand from October to January helped immensely as well.
    While struggling up the learning curve, I found this little freebie spreadsheet online:

    ..that also helped tremendously by helping to visualize my reduction strategies. Although it is setup for the snowball (Ramsey) method, I modifed it to show “Total Payments” by adding up the payments at the end of each row, and then subtracted the initial balance to come up with “Total Paid Interest”.
    I was pretty amamzed to see how much more money a pure snowball strategy can cost you.
    Sara, I will opine its not as insignificant as you characterize.
    That said, back in December, I did pay off a small account instead of pumping the money into a higher balance higher interest one because my motivation was flagging. And I must say, it felt damned good too.
    Seeing an account go Buh-Bye may well be worth the extra money it may cost you if it keeps you from giving up and going on a buying splurge.
    But now I am dealing with the aftermath as the euphoria of having that debt gone begins to fade. Somebody on one of these PF blogs has suggested that being in debt is just like being in the throes of an addiction. I couldn’t agree more. Perhaps the hardest struggle of all will be to keep spending habits under control as you shed the debt. Economists call it “pent-up demand”. I call it “hard not to get stupid with your money”!

  • Reply MVW |

    We opted to pay off our debts starting with the smallest balance and moving up from there. It’s been working great for us. But one suggestion I haven’t seen is buying a home/office budget booklet at your local office supply store. It helps to put all your expenses and income on paper each month. We’ve been doing it that way for 15 mos. and just recently switched to Pear Budget, a simple, free, excel-based software program. But I’d highly advise doing your budget on paper first to really appreciate where all your money’s going.

  • Reply Julia |

    I’ve flip flopped between #1 and #2 quite a bit over the last two years. The nice thing about #2 is that the progress you’re making on your debt repayment is more visible. For some people, that’s more important. Ideally if you can do #1, that’s the best, as it’ll save you money on the interest. BUT, depending on your interest rates, it might be fairly negligable, so you might as well go for #2.

    For now I’m sticking with #2, as I like to see the items drop off my list completely. πŸ™‚

  • Reply AverageJoeInTexas |

    Great Post! I’m very excited for you and your progress.

    My wife and I used the smallest to largest debt elimination plan years ago and it worked great for us. Getting on a budget was necessary for the debt elimination, but it also allowed us to evaluate our spending habits and make changes.

    Seeing the sum total of your debt is a very sobering activity. It definitely shocked us into taking action and vowing never to get in that situation again.

  • Reply Stephen |

    Don’t forget that by paying off the smallest accounts first, you’ll be greatly simplifying your monthly payment schedule. If you have a dozen bills due every month, you have a much greater chance of losing track of one or sending a payment out late.

    By paying off accounts, you can stop feeling like you’re under attack from all the payments due. If you pay by mailing checks, this method saves on postage too.

  • Reply Christine |

    I am so glad to have found your site! I have just started my pay down debt journey and realized… we are Broke! And have 60K of CC/loan/Auto debt. But, I am tackling my smallest card first (for near immediate gratification) & am working my way up. And with it my family is becoming grumpy… oh, but the goal will be heaven! so, let them suffer a bit. They’ll get over it. πŸ™‚

  • Reply LoriLynn |

    Everyone is so helpful at this site, I love it!
    I think the hardest thing for me is the overwhelming sense of panic and depression that hit me once I realized how far in debt I was and how long it was going to take to weed it out! I started with the smallest card first since I had a lot of small payments and forgetting one $10 minimum payment to Home Depot added a $40 late fee! ridiculous I know, but simplifying the payment schedule by ridding the small $10 and $20 minimum payments for store cards is helping tremendously with the overwhelming feeling!

So, what do you think ?