How to Get Out of Debt: Step 6 – Make a Plan to Pay Off Your Debt

Corey —  May 19, 2010

       This article is the sixth in a series on how to get out of debt. If you haven’t already, you should check out the previous articles:

Step 6 – Make a Plan to Pay Off Your Debt

       Now that you have your starter emergency fund in place, it’s time to start using the extra money you’ve found/earned in Step 4 to pay off your debts. But to do this effectively, you need to come up with a plan. How are you going to pay off your debts? Which ones will you pay off first? How will you determine your next target debt?

       There are several ways to set up your debt payoff plan. All of them, however, require that you know the interest rate, balance, and minimum payment for all of your debts. Then, you can rank them using one of these three methods:

  • Highest Interest Rate First – Start your list with the debt that has the highest interest rate. Then put the debt with the second highest interest rate below that. Keep doing this until all your debts are listed. This is the best way to pay off your debts if you’re looking at the numbers only. (This is the method I recommend because you’ll pay the least amount of interest this way. If you use another method, you’ll pay more interest. If you need more than numbers to motivate you, it may be better to use a different method so you’ll actually stick with it.)

  • Lowest Balance First – Start your list with the debt that has the lowest balance. Then put the debt with the second lowest balance below that. Keep doing this until all your debts are listed. This method feels good psychologically because you’ll get some small wins fast, but it could cost you quite a bit in the amount of interest you’ll end up paying. (Depending on the interest rates of your debts and their balances, this method could cost you much more in interest because you could be paying higher interest rates for a longer period of time.)

  • Highest Stress Level First – Start your list with the debt that worries or stresses you the most. List the next highest stress debt below that. Keep doing this until all your debts are listed. This could be a good way if you worry a lot about your debts, but it could also cost you a lot in interest payments.

       Regardless of how you list your debts, how you’ll pay them off won’t change. You’ll have to pay the minimum payment on all of them regardless of where they’re listed. Then any extra money you can find will go toward paying the first debt on your list. After that one is paid off, you’ll take that first debt’s minimum payment plus any extra money and put it toward paying off the second debt. You’ll keep repeating this process until you’re debt free!

       If you’re behind on your debts and your creditors are starting to tell you they’ll foreclose or send your debt to a collections agency, you’ll need to come up with a plan for how you’ll deal with the situation. Do not go to a debt management service. They cannot do anything that you can’t do by yourself. They’ll want to charge you fees for their service, and that’s the last thing you need while trying to get out of debt. You can negotiate with your creditors by yourself, but you’ll need to remain calm and be ready to compromise. You’ll have to work with your creditors to come to an agreement that’s good for both of you.

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       If you want to keep getting tips on how you can get out of debt and manage your personal finances well, make sure you sign up for free updates to Provident Planning! I’ll be continuing this series throughout the year while I also explore other aspects of personal finance.

       What’s your plan for paying off your debt? Let me know in the comments below!



Corey is currently pursuing a Master of Arts degree in religion. While he enjoys learning and writing about Christianity, another one of his new passions is writing about personal finances in order to help others make wise decisions with their money.