It has long been advised that when paying off debt you should put more of your money towards the debt that has the highest interest rate. The rationale behind this is that by getting rid of that one first, you will be saving money in the long run because of the amount you save in interest. To get started you would list your debts in descending order by interest rate and begin paying as much as you can towards paying off the first on the list. Then, take that payment and add it to the payment you have been paying on the second card, getting that one paid off faster. You keep going this way until your debt is paid off, commonly called Snowball Effect. Suze Orman advocates this approach and you can find more information at her website. Her plan directs you to basically find a total amount you can pay towards the debt per month. On each debt, pay more than the minimum required by something like $10 and pay the rest of your budget on the account with the highest interest. It looks to me that this approach will also very sloooowly increase your credit score because you will be paying more than the minimum on each debt and that is something reported to the credit bureaus.

Another approach would be to list your debt in ascending order, paying the minimum amounts on everything but the first card listed. Towards this debt you would pay the rest of your ‘debt budget.’ The rationale behind this approach is that, in a time where it is difficult for a lot of people to stay away from credit, you will receive nearly instant gratification, making it easier to stick with your debt payoff plan. Although less popular, this way is not always any worse than the traditional way as you can see at The Simple Dollar. Dave Ramsey advises using this method as part of his Baby Steps and many people, including myself, have had success with this.

The Debt Planner in MS Money is pretty much what I call a Dummy Program. You punch in your numbers and it tells you what to do, even going so far as to automatically schedule monthly occurrences for the accounts you enter into the debt plan. Unfortunately, if you go through it you have to do what it says. There is no tweaking, that I have found, that will allow you to use the planner with Dave Ramsey’s snowball method.

It will take you through different scenarios based on the amount you allocate monthly towards the debt included in the plan and any one-time payments you might make. It will tell you the minimum payment required for all accounts and ‘what if’ plans if you increase your monthly debt budget by $10, or whatever. But it will allocate that extra $10 towards the account it chooses based on the traditional debt reduction guidelines. This means that the extra will be added onto the higher payment for the account with the highest interest.

It is a great tool, don’t get me wrong, it’s just not the method I am going to use. It is thoroughly ‘idiot-proof’, provided you have the required information handy (which would be your statements and such) and will set you up painlessly, especially if your financial institution allows for full integration with MS Money and you can set up your payments within the program. The following is a quick and easy tutorial on how to set up this traditional Debt Reduction Plan using MS Money Debt Planner.

If this is your first stop to my site, it bears mentioning that I am using MS Money Plus Deluxe. You’re going to start by logging into your MS Money program and settling at the ‘Home’ page. You are going to click on the blue ‘Planner’ tab at the top, then the ‘Debt Reduction Planner’ link in the big orange box.

You will be taken to the front page of the planner which will give you a very basic rundown of what will take place. Go ahead and click on ‘continue’ after reviewing the information. After, you will be taken to a window that will allow you to enter in your accounts and then place them in your debt plan. If you already have your accounts entered in, they will be listed under “Debt Accounts Not In Debt Plan” and you can skip ahead. At the bottom is a row of buttons and, if this is your first time with the plan, the only one highlighted will be ‘new account.’ After making sure you have all of the information on your accounts, such as statements or online access, click on that button to start the process of entering in your accounts.

A little window will then pop up asking you what kind of account you would like to set up. For our tutorial we are going to use fictional credit card accounts so I will choose ‘credit card’ and then click next.

The next window will ask you to name the account. Take some time to look through the accounts you will be including. Do you have more than one credit card with one lender? If so, consider naming the accounts with the lender name and last 4 of the account number. For example, ‘Capital One - 1111′ and Capital One - 2222. This will make it easier to distinguish between accounts just by name. Type in your name for the account and click on ‘Next.’

Next, the wizard will ask you what the opening value of the account is. Here, you are going to want to type in the current balance, not what you owed last month if you can help it. Get online if you have to and get the most accurate information available. And don’t believe Money when it tells you that you can estimate and change it later. You are motivated to do it now or you wouldn’t be reading this, so do it now! Our fictional account has a balance of $1,000.00 so that’s what we are entering here. The default currency is US Dollar so change it if you need to and click ‘Next.’

Now you are going to be asked if this is a credit card or a charge card. Credit cards accept minimum monthly payments, charge cards typically do not. Most people will have credit cards so that is what we will select here. There is also a box to check if you always pay the balance each month. If you are doing that, you probably aren’t needing a debt plan so why are you still here? I will leave the box unchecked and click ‘Next.’

Here you will enter the interest rate for the account and also any introductory rates in effect. Our account is at 22% with no intro rate. Enter your information here and be sure to enter in your intro rate, date of rate change, and permanent rate if applicable for accurate information within Money.

Now you will enter in your total credit limit on the account. Ours has a $1500.00 limit.

The next window will ask if you want Money to auto-balance your account each month. If you are still using these accounts, which you shouldn’t be if you want to pay them off, then you can choose ‘No’ to track each charge or ‘Yes’ if you aren’t using the account or pay it off each month. If you choose ‘Yes’, then when each payment to the account is cleared within Money it will ask you for your statement information, such as the new balance, etc. We are going to choose ‘Yes’ because we aren’t using this account anymore.

Here you can choose to add the account payment to the bill calendar. We are going to do that with our account here and we put in the minimum payment for now. Once we get our accounts in the debt plan we can play with the amounts we want to pay and change it then.

Next you can choose to add whether this credit card frequent flyer miles or points. To keep things simple, ours does not so we will choose ‘No’ then click on ‘Finish.’

You will see that we have finished setting up this account and it is now listed in the ‘Debts Not Included In Plan’ area.

I’m going to quickly set up 2 other accounts the same way, but with varying amounts so that we can get a good idea of what this planner does! Okay, now i’ve created two other accounts with varying interest rates, balances, limits and one with an intro rate. Don’t pay attention to the numbers because I’m sure they won’t calculate correctly with our fictional accounts.

In order to calculate the information for the Planner you need to place the accounts actually in the plan. For instance, your list of accounts may include 3 credit cards, a car loan and a mortgage. You may only want your credit cards in the planner, leaving the others as they are. To place the accounts in the plan, select the account and click on the ‘Move Up’ button at the bottom. It will not allow you to use CTRL + click to select more than one account so you will have to choose them one at a time.

Once we have moved our accounts into the debt plan, click ‘Next’ at the bottom and here we will ‘Define Your Payment Plan.’ This is where we can play around with different scenarios such as monthly payment amounts, one time payments, or when I want to be out of debt. We are choosing a total monthly amount to pay rather than a date to be out of debt. Right above the slider it will tell us the minimum amount that we have to select based on the minimum payment amounts we set up in the accounts. Look over this page carefully, including the bottom left corner. There is a lot of information here!

I’m going to choose a $500.00 monthly budget for my debt plan with no one time payments. Here is what my Status looks like before if I only pay the minimum payments:

Notice that it tells me that I will be out of debt on 08/31/2015 and will have paid $8622.00 in principle and interest, with interest being $3085.00. It also tells me to the right that a $100.00 purchase will end up costing me $155.72 in the long run. Wow, huh? Now take a look at what happens when I put my whole $500.00 a month debt budget in effect:

Now it tells me that I will be out of debt on 06/30/2010, more than 5 years earlier, and will have paid only $5945.00 in principle and interest, interest only being $408.00. A $100.00 purchase will now cost me $107.37 in the long run. Play around with the numbers and see what works for you. If you are expecting a tax refund, add it in and see where it gets you. Try starting at the minimum payment and see where an additional $25 a month gets you and how much less you will pay in interest with that little amount, how much sooner will you be out of debt?

When you have settled on your numbers, click ‘Next’ and you will see a pretty graph showing your reduction over time.

Click ‘Next’ again and it will show you the suggested payment plan for the accounts included in the debt plan. You will notice that the account I entered with the highest interest rate is the highest priority, Capital One - 222. Now you can choose which, if any, accounts you want Money to automatically enter into your bill payment schedule. The benefit of doing this is that it will track everything automatically and give you accurate information right within Money.

It shows that account 1111 will receive $21.00, 2222 which has the highest interest rate is getting $402.00 and the Visa is getting $77.00, the calculated minimum.
When you are done, simply click ‘Finish’ at the bottom and you will be taken to your ‘Home’ page. That’s it! It seems like it’s a really long process, but truly it’s not. It’s pretty difficult to find thorough information so I wanted to make sure I included everything in this post. Hopefully this will help get someone out of debt. If this helped you, feel free to send your savings my way for my move to California! Okay, fine. Just say thank you.