The Roll-Down Method for Debt Reduction

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Debt of any kind can turn into worry, especially if you're considering buying a home or expecting a child. How you focus your budget toward a full payoff varies depending on whether you need a mental boost or seek to minimize interest costs. If you need both, use a hybrid approach that both cuts down your interest over the life of the debt and gives you a good psychological start.

Basics

Get a grasp of your total debt. List the debtors to whom you owe money, including the balances, interest rate and minimum payment. Then decide how much of your monthly budget you can pay toward debt. With this chunk of money, you have options as to how you want pay your debt down. The key is to be consistent — pay the same amount in total each month, even if the amount to each debtor varies.

Interest Approach

If you're most concerned about interest payments, target the highest interest debt first. With this method, you pay minimums on every debt except the debt that bears the highest interest. If, for example, you have a credit card at 24 percent and a card at 7 percent, you make a minimum payment to the card at 7 percent and put the rest of your budgeted amount toward paying down the 24 percent card. Once the higher interest rate card is paid off, use your budgeted amount to pay off the 7 percent card. This approach minimizes your interest payments, but can take some time to see a final payment, depending on your balances.

Mental Boost

If your debt payoff needs a mental boost, use a different approach. Looking at your list of debts, make the largest payment to the smallest debt first, and make minimum payments on every other debt. Then roll that payment amount toward the next-smallest debt as soon as the smallest debt is paid off. This approach may cost you more in interest, but it gives you psychological support. As you see the number of creditors dropping off, you get the boost you need to stay on course in paying off your debt.

Hybrid

With a hybrid approach, you mix a bit of the interest focus with the psychological benefit of quicker payoffs. With this approach to a roll down of your debt, you pay slightly more than your minimum payment — as little as \$10 per month — and focus on the majority of your debt payments toward your target. You determine the target — quickest payoff or highest interest rate — depending on what drives you to get your debt down.