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This is Rule 4 in my 10 Rules to End Your Debt and Change Your Life

Now that we’ve compiled all of our bills, debts and monthly spending in one place, it’s time to move forward with debt payoff.

On your monthly debt budget, make sure you list your debts (credit cards, student loans, personal loans) in order, smallest to largest, by dollar amount.

This is the order we are going to pay them off.

Now you may already be thinking “Wouldn’t it make more sense to rank them by interest rate and pay off the highest rate first to save money?”

I find myself channeling Dave Ramsey in my response: If you are such a math expert, how did you get in debt in the first place?

The point I’m trying to make is that personal finance, at least the part about getting out of debt, is not about math. It’s about changing your behaviors and the way you think about money.

So yes, you would save a little bit of money by paying debts off by interest rate, but in my experience, you will be more successful if you build momentum and success by knocking out the smaller debts and reducing the number of creditors to whom you own money.

Start Small but Move Fast

Want to know how to pay off debt? When I first started making my debt payoff chart, I was shocked to see just how many department stores and credit card companies I owed money to. There was no way I was going to leave a $456 debt from Famous-Barr on my debt payoff chart for a year while I paid off something with a higher interest rate.

I wanted to get all those small debts off the books, cut up the cards, reduce the paperwork I had to keep track of, and move on with my life.

Every few months of following this plan I was able to tell another creditor “Thanks, but no thanks,” and send them packing.

So to make this work, we have to find extra money to throw at the smallest debt, because we can’t just pay the minimum payment due on each debt. This is why we worked on some of the previous Rules like spending less than you earn and making a debt budget.

The next two Rules in this series will focus on helping you find extra money to pay off your debts.

So we are only paying the minimum payment due on all debts, except the smallest one, where we are sending every extra penny we can find.

Pay Your Progress Forward

The second main part of Rule 4 is to use the Debt Snowball popularized by Ramsey as you move forward with debt payoff. What this means is that your efforts are like a snowball rolling down a hill. They start off small and slow, but build momentum and get bigger as time goes on.

Your snowball gets bigger by paying off a debt, then acting as if it is still there. I find the debt snowball calculator makes this more simple. That means just because you paid off a store card with a minimum payment, you don’t magically have extra money to spend on food or clothes. You have to pretend that you still owe that minimum due, and pay it towards the next smallest debt.

So let’s take a look at our fictional Jones Family from last week’s post. We can see that they have two credit cards with large balances, two student loans, and a personal loan. They have ordered them from smallest to largest on their chart.

In the white column on the far right, we see what they were able to pay towards their debts for this particular month. Though the minimum payment for their smallest debt is only $25, they paid a total of $675, meaning they were able to find an extra $650 to throw towards their debt.

This also means that when this debt is paid off, they can take the extra $650 PLUS the $25 minimum due, and start paying that amount at the next largest debt. As each debt is paid off, a little bit of extra money is added to paying off the next one, hence the snowball effect. This should give them $700 per month to throw at the next debt on the list.

As I mentioned before, this concept of debt payoff is controversial amongst those who give personal finance advice. And before I move on, I don’t want to suggest that you WILL fail if you choose to pay them off by interest rate.

I will say that I have been successful following this method, and that the momentum you will build by knocking out some of these small debts, minimizing the amount of paperwork and bills you have to keep track of each month, will outweigh the small monetary benefit of paying them off by interest rate.

Go ahead and run your numbers if you can. If you find that you will only pay your debt off a few months quicker over a multi-year period, is it really worth it to keep paying a minimum on a small debt for a long time, increasing the likelihood that you will accidentally miss a payment?

These 10 Rules are the rules that have worked for me. That is why I am sharing them with you. You won’t find any lectures on this site, nor will you find judgment. If you choose to go a different route and it works, I’m happy for you. I’m just trying to suggest the method that I think will work for the greatest amount of people.

Goal 1: Find as much extra money as possible to throw at your smallest debt.

Goal 2: Stay on top of all the previous Rules.


10 Rules to Eliminate Your Debt and Change Your Life

1. Combine Incomes, Finances and Efforts 

2. Spend Less than You Earn

3. Make a Monthly Debt Budget and Live by It 

4. Pay Off Debts Smallest to Largest, Regardless of Interest Rates

5. Make Big Changes for Big Results 

6. If You Don’t Need It, Sell It 

7. Save Monthly for Large, Anticipated Expenses

8. Set Aside Some Money for Fun

9. Pay Off Debts Before Investing 

10. The Goal of Work is Retirement