I love “barbershop” sayings. You know, those little nuggets of advice you’d get if you were hanging around with the much older, much wiser crowd. Things like “don’t count your chickens before they hatch” or “a bird in the hand is worth two in the bush.” For some reason, all these philosophers love poultry-based wisdom ….

Perhaps one of my favorites, because it applies to so many aspects of personal finance, is “If you don’t know where you’re going, any road will get you there.” Nowhere is this more true than with getting out of debt.

You’ve taken a big step by reading through the last few chapters, making mental commitments, setting goals, and trimming your expenses. But without an actual plan about “how much” goes where, you won’t get very far.

That’s what this chapter is about—deciding which debts to tackle first with the extra cash you manage to scrape together.

You’ll recall from earlier chapters that increased discretionary income is the real key to getting out of debt. In other words, you have to begin adjusting your cash flow (income and expenditures) to ensure that there’s extra money left over at the end of each month. If you don’t, all you’ll probably ever do is continue making minimum payments, which translates into decades of repaying debt.

So as you read the strategies in this chapter, realize that they all revolve around the idea that you’ve managed to scrape together some extra cash flow each month. If you haven’t, you need to revisit the budget chapter and continue to rework the numbers until you’ve found something extra to apply toward your debts.

This is one of the most important parts of your debt reduction plan, and is the place that you’ll actually find yourself getting excited about the difference your hard work is making.

In essence, the roll-down method requires that when one debt is paid off, the amount that had been going toward that debt is now added on top of the next debt on your list.

For example, let’s say you have three credit cards you’re paying down, all with minimum payments of $50. Your total minimum payments are $150 per month, but you’ve cut your expenses enough to be able to put $250 toward your debts each month. This means that after you make your minimum payments, you’ve still got an extra $100 per month to put toward the debt you’d most like to get rid of.

Once that debt is paid off, you take the entire $150 you were paying (the $50 minimum payment plus the $100 extra) and start paying that toward the next most hated debt. Of course, this is on top of the minimum payment you are used to making on the second debt.

Suddenly you have $200 per month going toward that debt ($50 minimum payment plus the $150 from the first debt). When that debt is paid off, you divert the entire amount you were paying on the second debt to the third.

As you can see, this accelerates your debt payments, and provides a very exciting turbo boost each time a debt gets paid off.

As you can see in this table, in February, all the money that was going to the first account gets rolled down to the next, which helps it get paid off faster. In March, all the money that had been going toward the first and second accounts (which are now paid off) gets applied to the third, accelerating its payoff.

No matter how much discretionary income you can free up or how you prioritize your debts for elimination, you should plan on

using the roll-down method. If you don’t, and you choose to spend the money you were paying on a now eliminated debt, the debt elimination process will take forever.

Before you do anything else, you need to first break your debts into three simple categories. Basically, all your extra funds will go toward paying off the different debts in one category before you move on to the next.

Essentially, there are debts you want to eliminate as soon as possible, debts you want to eliminate sooner than later, and debts you can save for last. That extra cash you have left over each month should be applied to those categories, in that order.

The debts you want to eliminate first are those that have the greatest potential to compound your debt problem if not taken care of immediately. While this can be any type of debt, depending on our lender’s terms, they’ll typically be debts with double-digit interest rates, no deductibility, and no relation to long-term assets or the creation of net worth.

Most typically, the debts you’ll want to take the axe to first will be …

The debts you want to get rid of sooner than later are the ones that might have lower rates of interest (under 10-12%), but are used to purchase assets that will eventually become worthless.

Unlike many of the debts you scheduled for immediate execution, these debts will have a specified term (a certain number of years) until they are paid off. If you continue to make the minimum payments, they will take care of themselves a lot sooner than other debts like your credit cards.

These debts, which you’d only put your extra cash toward if the ASAP debts are taken care of first, typically include:

Generally, I’m against paying interest to anyone when you could be using that money to enjoy life or reach your other financial goals. But there are certain types of debt that are crucial to helping you reach your long-term goals. These debts have a reasonable rate of interest, a set repayment schedule, and are generally deductible with regard to your interest costs. Because of these favorable factors, they should be the last to go.

That’s not to say that there aren’t lousy versions of these loans out there. If your interest rate is high compared to similar loans, or can adjust significantly, you’ll want to move them up in the order of elimination.

The two types of loans that will typically be the lowest priority as far as receiving your extra cash are …

Okay, so you’ve broken down your debts into three categories. Now you have to decide where any extra money should go within these categories and subcategories. If you have 2 (or 10) credit cards, which one do you pay off first? What about the different car loans you have?

The truth is, any method that is used consistently will help you make progress. The trick is to find the method that encourages and motivates you the most.

How fast you actually make progress will be affected most by your willingness to trim your expenses and increase your payments. Aside from that, the amount of time it takes using any one method versus another won’t vary by more than a month or two.

As always, it makes a great deal of sense to take care of all past-due amounts first and foremost. You want to avoid collections if at all possible, as well as preserve your credit score.

The most traditional wisdom on eliminating debt is to eliminate the highest-interest-rate debt first. In fact, this strategy goes beyond wisdom or preference … it actually makes the most mathematical sense.

At the core of this strategy is the reality that the faster interest piles on, the less of a dent each payment makes in your principal. So if you can get rid of the debt that is adding interest the fastest (not the most dollars, but the highest percentage), you will get around to paying down your principal sooner.

Let’s look at a simple example of three, $1,000 debt balances with three different interest rates:

Though eliminating your smallest debts first may seem the opposite of common sense, it’s actually my favorite method. Though it won’t eliminate debt quite as fast as paying off the highest interest rates first, I’ve found that it creates a mountain of motivation.

The benefit comes from the fact that the number of your incoming bills will quickly dwindle by putting all your extra cash toward the smallest balances. This creates the equivalent of getting on the scale and realizing you’ve lost a few pounds through your hard work and discipline. For most of us, that’d be an encouragement that you’re not wasting your time and to keep pressing forward.

Chances are, if there are 10 companies you owe money to, some will have large balances and some will be just a few hundred dollars. By devoting your extra cash to those smaller ones, you’ll quickly go from 10 statements per month in your mailbox down to 4 or 5. What a stress reliever that would be, to have half of your creditors off your back and to get to cut up those cards once and for all!

For some of us, the greatest stressors are the biggest numbers. They feel like Mount Everest compared to all your other financial molehills. By taking care of them, or rather, by making a dent in them, you feel like progress is being made. The risk to this method is that after 6 to 12 months, you could also feel like you’ve really not made any progress. This is especially true if the largest debt is also one of your higher-interest-rate debts, meaning that it compounds on itself relatively fast. If you choose to use your extra cash to tackle the largest balances first, you’ll also need to be super-diligent about not adding anything additional to that debt or creating others. Both of these may cause you to throw in the towel as your debts seemingly continue to mount.

This method essentially focuses extra cash on debts that weigh down your credit score. For example, you might focus your extra cash on your retail credit card as opposed to your auto loan, because the first makes you look like a greater risk to lenders than the second. Other debts in this category would include payday loans, installment loans, and government debts.

You might also focus on getting your maxed-out cards paid down, since that can reflect positively on your credit score. Because many lenders look at the “balance-to-limit” ratio, or how much of your potential limit you’ve used, it’s in your favor to not appear overextended. In fact, when you apply for a new loan, it would be ideal if your balances were less than 50% of any account’s limit.

In the short term, any type of cancelled debt, even if it was closed at your request, can translate into a black mark on your credit score. However, over the long run, closing accounts will help your credit score as well as take temptation out of your pocket.

With that in mind, it makes some sense to devote your extra cash toward the debts you’re going to get rid of anyway. Get them off the books as soon as possible, let your credit score heal, and get on with life. Best of all, once they’re cancelled, you’ll have one less debt that you can run back up.

Because some debts are deductible on your tax return, they may be more favorable than others when it comes to deciding which ones to eliminate last. Most often, deductible debt is limited to student loans and mortgage debt. Occasionally, though, other types of debt are deductible if they are related to a business or investment activity, but you need to consult your local tax guru to make sure.

To decide if you should keep a deductible debt as opposed to a nondeductible one, you’ll need to know your income tax bracket and how to use a calculator.

From a strictly psychological point of view, I’d definitely advise people to eliminate the debts that cause the most stress first. While there may be others that make more mathematical sense, staying encouraged is the most important thing.

But before you devote your extra cash to a debt that’s stressing you out, ask yourself the following question: If you take care of the one that bothers you the most, will you care about any of the others?

One of the things I’ve learned as a writer is that I do a better job if I change my scenery every few hours. I also do better if I write about something else every couple of days. If I try to sit still in the same place for a day, or write about the same thing for a week straight, it will lull me to sleep like driving through the desert at 2 A.M. By changing my scenery, method, and focus, it keeps me on task and moving forward.

Getting out of debt may be that way for you. That’s okay! I’m giving you permission to feel “blah” about your strategy after a while.

One of the most important things to remember about your debt repayment plan is that it is not set in stone. You are allowed and encouraged to be responsive to changes in your situation and your anxiety, especially if it will keep you making some kind of forward progress.

If, in the middle of funneling your extra discretionary income toward the largest balance, you decide that it’s not the best method, then switch! Be proud of yourself for making a dent in the largest debt, then move on to something else. You have my blessing to take a break from one method, as long as you choose another. Just keep doing something!

In addition to years of working as a Certified Financial Planner, I’ve worked with hundreds of people doing behavioral counseling. One of the things I’ve noticed in both my own behavior and others, is that I “know” well in advance of when I’m going to cheat on a diet, exercise plan, or budget. In hindsight, my getting off track was never really a surprise. There were always signals and warning signs that I was about to give up on something. As I’ve become a little older and wiser, I’ve begun to tell these things to my accountability partners sooner. In turn, they’ve been able to encourage me and keep me focused. What are your “red flags”? How do you know when you’re about to cheat, be bad, or cut loose? Be sure to share your thoughts with someone so they can help watch out for you!