The Secret to Making Progress on Debt Management

It can be a struggle to deal with debt, not just because of the money, but because of the psychological toll of making payments, tracking payments, and getting out from underneath the burden. This is especially the case if you have credit card or other consumer debt.

There are loads of strategies to handle it, and because debt is a matter of money, those strategies often include math. Unfortunately, failing to take psychology into account can mean the difference between success and failure in money management, and debt is no different.

There is, however, a strategy that is so simple you'll hardly believe it.

Pay your small debts firstForget for a moment about interest rate differences and APRs. When it comes to paying off your debts, the goal shouldn't be to minimize your interest payments completely; it should be to create the kind of payoff momentum you can follow through on. This is especially the case if you find your debt to be dispiriting and stressful. So, don't focus on math: focus on winning.

To create that kind of momentum, focus on paying your smaller debts first. The process requires, unfortunately, listing out what you owe and where. For example, you can make a spreadsheet like this one:

It can be a little difficult to see it all on paper, but trust me, it's good to know exactly where you stand. While these numbers are made up, doing the exercise in reality can give you a good idea of what your bare minimum payment requirements are. Scary, but important.

From here, you can make a decision about what to do next.

You probably have a limited amount of money you're working with in terms of payments, and throwing all of that money at an immovable wall (in this case, your highest-rate debt, which is also the largest) can be really depressing. In our example, imagine your minimum payments come to $481. You want to take this bull by the horns, so say you've decided to allocate $700 toward debt.

The math, again, tells you to put it toward the high-interest debt, as it would save you a lot of money in interest. But if you put it toward the smallest debt, you'll have an awesome victory in just eight months, when that debt gets paid off in full.

From there, you roll the payment from that card and the extra money into your other debts, and you suddenly have the wonderful feeling of momentum.

Is it really the best way?You might be the kind of person who wants to maximize your interest savings, and if so, then this method might not work for you. This is really for the person who feels overwhelmed and is looking for some financial wins -- for a feeling of progress and good feedback. It is, in short, for the "carrot" person.

If that sounds like you, consider taking the plunge and paying off your small debts first: Build that momentum, and get out of debt once and for all.

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