The Nontraditional Way to Get Out of Debt

Getting out of debt is a dream many aspire to, but don't know how to go about. Most of us have heard that to get out of debt, pay the target the debt with the highest interest rate and work you way down from there.

Usually, this means credit card debt.

However, I liked the method spelled out in Dave Ramsey's book, The Total Money Makeover, better. His method is based on common sense - eg, the way we as humans behave, believe and perform, not some numbers on a balance sheet.

He calls it working a debt snowball, and it involves the following:

Targeting the Smallest Debt First

You don't have to go figure out interest rates and how much you're paying on what card. While numerically this makes sense, it doesn't do anything for what I call your "get up and go-ness."

All you have to do is look at your bills and figure out who you owe the least to, and start with that debt.

This also does another thing, it allows you go get some steam under you, to paraphrase Dave. I thought this made a lot of sense as, being human beings, we all need to get some small victories to keep us motivated.

Say you have debts of $14,000 and they break down like this:

Which Debt to Choose

$900 - Student Loan

$1,600 - Furniture Store Account

$2375 - Visa

$3845 - MasterCard

$5280 - Car Loan

Student loans and car loans usually carry much lower interest rates than department store credit cards and bank-issued credit cards (MasterCard, Visa, etc.).

To attack this snowball doing it the interest rate way, you would probably be advised to pay off the $3845 credit card, then the $2375 Visa card, then the $1600 furniture store account, then the $5280 car loan and finally the $900 student loan. Accomplishing Debt Freedom

BUT, how accomplished would you feel if you took say, an income tax refund and just knocked out that student loan. Sure, it probably has the lowest interest rate, but look at the boost it will give you.

Now that you don't have that coming in anymore, you can take what you were contributing towards that and attack the furniture store account. With a bonus from your job and a few weeks of overtime, you knock out the furniture store account.