by Paul E. Zimmerman

Created on: March 23, 2008

When I was in the U.S. Army Infantry, I frequently received instructions as to what I was to do in the field in the form of mission briefings. The major element of these briefs was known as the "order of battle." In our military, this is information on the composition, location, strength, training, tactics, etc. of the enemy forces we would be likely to encounter in the field. With this information, we would be better able to engage and destroy the enemy.

Yesterday, I was thinking of my debts in a similar fashion. Some are bigger than others; some are more expensive in terms of interest rates than others. Recently I realized that it would be best to pay some debts faster than other ones not because of their relative interest rates, but because of the lower monthly minimum payments that would result. I decided that the best plan of action for eliminating my debts would be to direct extra payments to those debts that making extra payments toward would result in the lowest monthly minimum obligation now.

Therefore, I have come up with the first part of my financial order of battle: distinguishing between debts I can tackle that will free up more cash flow now even before they are fully paid versus those that must be fully paid to reduce payments. The first type of debt is things such as credit cards, which feature decreasing minimum payments derived from a percentage of the outstanding balance of the debt. The second type of debt is amortizing debts, such as my new mortgage, which features a level payment no matter how much extra you throw at the principle balance in any given month.

What I then did was order my debts such that the declining minimum debts come first. Both of these cards are fixed at 3.99%, and one derives a minimum payment as 2% of the outstanding balance, while the other calculates the minimum payment as 1.5%. At present, making larger payments to the 2% card will result in the largest reduction in monthly minimum payments. In my case, the list then reads:

1. 2% minimum payment card
2. 1.5% minimum payment card

In this order, I will pay the minimums of both cards, but put extra cash toward the debt at the top of the list until it is retired (in the case of credit card debts, which typically feature an absolute monthly minimum payment of $10, I will put extra cash toward the higher balance of the two when they reach this stage, switching back and forth from month to month until I have enough extra cash to wipe out one of them with one final payment).

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