### Debt reduction... some simple ideas

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I'm not claiming to be an expert in this field. I do, however, have some ideas to share here. So, here goes.

First, take stock of what debts you have and what interest rates you're paying on them. Get out some paper and make some columns and list everything. Look at the payment, balance and interest rate columns and make a plan. There are a couple schools of thought here and I'll try to give equal billing to each.

One way is to pay the most you can on the smallest remaining balance while paying minimums on everything else. When that one is paid off, start paying the most you can on the next smallest balance to pay it off sooner while paying minimums on the rest. Just keep doing this until all are paid off.

Another way is to pay the most you can on the highest interest rate loan while paying minimums on everthing else. Follow the same system as above but use higher interest rates as the criteria rather than lowest balances.

I don't doubt there's a nice algebraic formula which might show which is best in a given situation. Unfortunately, I don't have it. Personally, I like the first method just because it gives more immediate gratification ("I've got that one paid off!") than the other. It also allows you to put more money on the second target balance sooner because you eliminate the first one sooner in most cases.

These methods assume no availability of additional credit. If anyone's interested in some ideas for situations where additional credit is available, I'll be happy to post those, too. I hope this helps.

-- Gary in Indiana (gk6854@aol.com), August 30, 2001

a little note,, tranfer your credit cards,, to one with a lower interest rate,, if the balance is big enough,, it can help save,,, as long as you dont use the empty one again

-- stan (sopal@net-port.com), August 31, 2001.

Very true, Stan. That's one of the ideas for situations where additional credit is available.

-- Gary in Indiana (gk6854@aol.com), August 31, 2001.

Gary

Hubby and I are working on this issue as we speak. I've heard some financial advisors say to clean out savings and stop putting into savings that are generally lower interest in favor of paying off cards. I haven't done this because I'm not comfortable with it, I like to have a cushion that's liquid and not based on credit. I suspect there's probably some happy medium to find after doing a lot of math:) What are your thoughts?

-- Susan (smtroxel@socket.net), September 03, 2001.

Susan,

There's no math that will give you a comfort level. Math is rational and comfort levels are emotional. As far as the math goes, diverting money from low interest savings to eliminate high interest debt is the way to go. However, if not having any money in the bank keeps you up at night, then it's not worth the dollars saved.

I tend to have a bias here I ought to disclose. I'll probably hear about this but here goes. Most men tend to be more risk oriented than most women. Most women tend to be more interested in security and safety than most men. A level of savings at which I or your husband might be comfortable while paying off debt would likely be lower than one which would make you sleep well at night. The only advice I can offer would be to put as much money toward high interest rate debt payments as you possibly can and still get a good night's sleep.

I know that's not the neat formula for which you might have hoped, but it is one that will probably work best in the real world. If you have available credit lines open to you, there's less need to worry about taking away from savings and paying off debt as you can always go back to the credit line and get the same money back again. In the interim, you've not paid 18% and not earned 3-4% (pre-tax) on each and every dollar you put toward debt instead of savings. That's the math of it but the decision as to how much to divert has to be yours.

Good luck to you and your hubby in reaching some sort of accomodation. I hope this helps.

-- Gary in Indiana (gk6854@aol.com), September 03, 2001.

Thanks Gary, and I'd agree with you about women tending towards a more conservative financial outlook. Every time I've gone riskier I've had reason to regret it and go back to conservative eventually. Here we've got less of a difference between the credit interest and savings interest than your example but it's still a significant one so it really is smarter to dump savings and get out from under the credit card rates. Hard to do though, we'll keep thinking on it.

-- Susan (smtroxel@socket.net), September 03, 2001.

Hmmmm...anyone have any idea why women are less risk oriented than men when it comes to investments? With my parents, it was the opposite, but my risk oriented mother was probably strongly influenced by her very risk oriented father.

-- Cathy in MN (logholm@rangenet.com), September 06, 2001.