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Repaying debt can be a huge challenge. It can be difficult to determine how best to attack the problem of owing money, especially if you have multiple different loans and credit cards to pay down and only so much money to go around.
There are a lot of different approaches to debt repayment that financial experts suggest trying when working to become debt free. One of these options is the roll-down method suggested by finance guru Suze Orman.
But how does this method work, and could it be the best choice for you?
What is the roll-down method of debt repayment?
Orman's roll-down method of paying off your debt involves taking a couple specific steps:
- Focus first on paying off your highest interest rate loans (while still making minimum payments on all debts). You should pay as much extra as you can each month towards the loan at the highest rate so you can pay off your debt faster. However, Orman advises making sure that you stay within your budget. She also says not to choose a payment that's too high to be comfortable since you may not be able to stick with your payoff plan otherwise -- which can be discouraging.
- Roll over the payments you were making to your debt with the next highest rate as soon as one credit card or loan is paid in full. For example, say you were paying $200 a month toward your debt with the highest rate. Once that debt is paid off, you'd add that $200 a month to the minimum payment you were making on the loan with the next highest rate.
This technique helps you decide which debt to pay off first. And it helps you build momentum as you roll each debt payment over to the next loan you're focusing on once each debt is retired for good.
Could the roll-down method work for you?
The roll-down method is very similar to the approach taken by another personal finance guru, Dave Ramsey. But Ramsey refers to his method as the snowball method and he advises focusing first on paying off your loan with the lowest balance, then rolling over that payment to the loan with the next lowest balance and so on until you're debt free.
Ramsey believes his snowball method is best because you score quick wins by focusing on low balance debt, so you stay motivated. But Orman's approach has the advantage of saving you more money in interest. Since you're tackling your debt based on which is most expensive, you can get rid of the costliest debts sooner with her approach. With Ramsey's technique, you could get stuck paying a fortune in interest on expensive and costly debt. This is because you're focusing on paying off cheaper loans with smaller balances for months or years before tackling the larger, costlier loans.
Ultimately, if you feel like you're going to have a very difficult time sticking to your debt payoff plan, the psychological benefits of Ramsey's approach could outweigh the added interest costs you're likely to incur with it. If his approach helps you stick with a payoff plan that you otherwise wouldn't keep working on, then you'll end up better off.
But Orman's approach definitely makes more financial sense for most people. If you can find other ways to keep on track, then the roll-down method may just end up being the best option for you.
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