Ways to Get Out of Debt

Everyone is buzzing about debt these days. We hear about it on a national, state, and local level. For consumers, there are many possible ways to get out of debt faster. Some methods are more "do-it-yourself" while others require some professional help.

Two of the more popular do-it-yourself debt elimination strategies are the Snowball and the Rolldown. Neither of these is inherently better than the other. If you decide to use either one, you will get out of debt faster than you will trying to pay off your debt without a plan.

Here's how the snowball method works. You pay off your account balances by focusing on the account with the highest interest rate and working your way down the line to the last (lowest interest rate) account. During this process, you make only the minimum required monthly payment on your other accounts, while you put all your extra available money towards paying down the balance on the account charging the highest interest. You want to be very mindful to only make the minimum monthly payments on every creditor account, except the one currently with the highest interest rate. On that account, you should put any and all extra available money towards paying off the balance by making extra payments to principal.

After you pay off the first account balance, you put your new positive cash flow - from that retired monthly note - to work by making extra payments to principal on the next account with the highest interest rate...and so on, snowballing the monthly payments on your debt, until (applause) you are debt free!

A quick note: If you choose to include your mortgage in the snowball strategy, be sure to calculate and use the interest rate you pay after you factor in your mortgage interest tax deduction. Example: You pay 5% on your mortgage and you are in a 25% marginal tax bracket. That means you can deduct 25% from your 5% mortgage, which brings your rate to 3.75%. So you should use 3.75% in determining your snowball strategy.

The debt rolldown system is very similar to the snowball method with one key difference. You again will be focusing on only one account at a time, but you start with your lowest account balance first and progress to paying off the largest one. As with the snowball, you should make only the minimum payment on your other balances, while you put all extra available money towards paying down the account with the lowest balance.

Like the snowball system, the rolldown plan gets you out of debt faster because your focus is on one creditor at a time, rather than paying a little extra on all of your accounts each month.

Which one is better? That depends on you. Mathematically, the snowball will get you out of debt faster than the rolldown. However, in practice, the rolldown is often better. The reason is that you get a psychological boost by paying off the first small debt often in a very short time, which can certainly help motivate you to stay on your path to zero debt.

In other words, deciding to use the snowball using math alone may not be enough to keep someone disciplined enough to stick to the plan. It could take them a relatively long time to pay off the first high-interest rate account if that account carries a large balance (For example, a $25,000 balance on a 21% credit card). That length of time could fuel a "no light at the end of the tunnel" mentality causing one to drift back to behavior that got them into trouble in the first place.

On the other hand, a rolldown plan often provides results (i.e., paid off accounts) much earlier in the process which gives a person positive re-inforcement to stay the course. There's no real wrong way to go, as long as you stick to your plan.