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.

more…