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This chapter is from the book

A Plan for Debt Repayment

The next step is to assemble a debt repayment plan, which is far easier than it sounds. Remember the list of debts you made before, when you were attempting to reduce your rates? Make it again with all the debts you have now and their current interest rates. This is the backbone of your debt repayment plan.

There are two common ways to build this plan. One method is to pay off the debts in order of their balance, from smallest to largest. This is often referred to as the "debt snowball" and is popularized by personal finance pundits such as Dave Ramsey. The advantage of this plan is that it lets you feel the thrill of victory over debt as soon as possible, since the easiest debt to pay off is the one with the lowest balance.

On the other hand, the method that minimizes the total amount of dollars you'll pay out is to pay off the debts in order of their interest rates, from largest to smallest. The largest interest rate debts are the ones that are eating up more of your money, so paying them off first means that you'll end up, over the long run, paying less in interest. However, this plan can sometimes leave you with long periods without the thrill of eliminating a debt—it's psychologically more challenging.

Whichever route you choose, set up your debt repayment plan by listing the debts in that order. Then, each month, make the minimum payment on each debt except for the top one. For that top debt, throw everything you can at it. You should strive to make at least a triple payment on that bill at the top of your list at a minimum. Set a goal for each month—how much can you consistently pay on that bill? Treat that amount as the minimum payment on that top bill.

When you manage to pay off a bill, cross that bill off the top of your list and celebrate a little! Then get down to business on the next bill. Add the payment you were consistently making on the previous bill to the minimum payment on this new top bill—that's your new minimum payment! Strive to make it each month.

The question many people ask is how can I possibly make more than the minimum payments when I was not really making them before? You'll have to make some choices along the way. Those choices, however, are often less painful than people initially think they will be. Stay tuned—Chapter 8, "Frugality as Framework," will explain all about it.

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