Debt elimination strategy 1: Debt roll-down principle
Written on 9:33 PM by Yuen Lung
The basic concept of this strategy is "Roll Down". It suggest to add the payment of a pay off debt to the next priority debt. Repeat this process continues until all debts are eliminated. This is to speed up elimination of all debts.
Steps:
1. List down all debts
Create a check list of all debts as followed:
| Debts Name/Description | Balance | Payment | Interest Rate | Outstanding Terms | Total Interest Incurred |
2. Prioritise debts
There are a few ways to prioritise debts:
i. Debts with smallest outstanding balance has higher priority. Few debts will be eliminated very fast and it provides the motivation to continue the debt reduction plan.
ii. Debts with highest interest incurred has higher priority. The debt with highest interest rate might not incurring most interest paid. The nature/method of calculation of the interest play an important role here. E.g. monthly/daily rest, compound or flat interest, fix or floating rate, etc. Especially for debt with compound interest, the sooner it is paid off the lesser interest incurred.
| Period | Debt A (Priority=1) | Debt B (Priority=2) | Debt C (Priority=3) | ... |
| Month 1 | ||||
| Month 2 | ||||
| : : |
3. Pay off debts according to the priority
Pay minimum payment for loan that is not the top priority. Come out with additional amount to for the debt with priority rated 1. After the top priority debt is paid off, pay the debt with the following priority with the minimum amount required plus the entire amount that have been paying on debt priority 1. This process continue until the last debt is clear.
| Period | Debt A (Priority=1) | Debt B (Priority=2) | Debt C (Priority=3) | ... |
| Month 1 | 100 | 200 | 300 | |
| Month 2 | 100 | 200 | 300 | |
| Month 3 | 100 | 200 | 300 | |
| Month 4 | cleared | 200 + 100 | 300 | |
| Month 5 | 200 + 100 | 300 | ||
| Month 6 | cleared | 300 + 200 + 100 | ||
| Month 7 | 300 + 200 + 100 |
Success factors
The method above just provide a mechanism for us to clear debts. It will not work without commitment : Stop charging on unnecessary, be consistent and never late for payment.
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