How To Pay Off Your Debt Using The Stack Method

How To Pay Off Your Debt Using The Stack Method

Whether it’s consumer debt on credit cards, tax debts or a mortgage, most people find themselves weighed down by debt at some point in their lives. This can keep us working at jobs we hate just to pay the bills and keep our heads above water. By learning how to pay off debt, you can release the burden and remove some stress. I’m going to explain how to pay off your debt as fast as possible using the “stack method”.

Money picture from Shutterstock

Step 1: Stop Creating New Debt

Most people don’t receive training in handling money and how to live within their means. If you’re in debt, then you’re probably one of these people and it’s time to bite the reality bullet. It’s going to be impossible to get out of debt unless you retrain your financial habits right now.

You must make a stand against all the marketers trying to take your hard earned money or offering easy finance. You don’t need more stuff to make you happy. What you need is financial peace of mind. So cut up your credit cards or freeze them. I mean this literally. Put them in a container of water and stash them in your freezer. Then when there’s an opportunity to spend, you have time to thaw out (you and the credit cards) and really decide if you need that purchase.

Step 2: Rank Your Debt By Interest Rate

Make a list of all your debt with amounts and the interest rate. The highest interest rate should be at the top as this is what you’ll pay off first. Paying off your high interest debt is the key to the stack method. Interest is a powerful weapon and right now the bank or other financial institutions are using it against you. It significantly increases the amount you need to pay back, and often we’re completely unaware of how much that is.

For example, if you have a $10,000 credit card debt at 20% interest where you pay a minimum payment of $200 a month, you will end up taking 9 years and 8 months to pay off the actual amount of $21,680 including $11,680 in interest!

Step 3: Lower Your Interest Rates

You can often lower your credit card interest rates by doing a balance transfer. This means moving your credit card to another bank and they will lower the interest rate to get your business. Shop around and try to get the lowest interest rate for the longest duration (preferably until it’s paid off completely). Just make sure you’re reading the terms and conditions carefully so you don’t get stung by the new bank in other ways. Once you’ve done this, you can order your list of debt again if things have changed. (Check out Lifehacker’s monthly Ratehacker column for good balance transfer deals.)

Step 4: Create A Strategic Spending Plan

This is where we improve on your financial control from Step 1. Take a piece of paper and write down your income after tax and all the expenses that you have. This will include the minimum payments on all your debt. Look at your expenses and then rank them in order of importance to you. Look at the items on the bottom of your list and decide whether you’d rather have them or be financially stable. The objective is to create a strategic spending plan where your expenses are lower than your income.

You also decide how much you’re willing to spend on each area of your life. You can allocate amounts for rent, groceries, eating out, buying clothes and other activities — however, realise that once you’ve spent your allocated money there’s no dipping into other areas. It also helps to have a “fun account” that you can spend on what you like and an “emergencies account” in case your car breaks down.

In your strategic spending plan, you also want to include an extra amount you’re going to use to pay off debt. Can you afford $20 a week? $50? $100? $200 or more? It’s important that you get a realistic number that you can commit to each week without fail. This is your “stack repayment”.

Step 5: Create A Repayment Schedule

The first part of the stack method is to cover the minimum payment on every single debt you have. Any time you miss a payment, you incur fees and these add up quickly. This also includes making the minimum payment on the debt with the highest interest rate. Then for the debt with the highest interest rate (your “target debt”) you’re going to add the stack repayment from your strategic spending plan. You apply this stack repayment and the minimum payment until that debt is paid off in full.

As your official minimum payment decreases, you add that extra amount to your stack repayment. So as your minimum repayment drops your stack repayment increases equally. This will compound how fast you pay off the target debt by adding even more to the repayments you’re making.

Step 6: Reward Your Progress

You want to track your target debt so you can see your progress along the way. You can also decide on milestones that you’re going to celebrate and reward yourself on. A reward doesn’t have to cost money but if it does, then it comes from your previously allocated strategic spending plan.

This is an important step as it will keep your motivation going when you feel your willpower fading. Just like you’ve trained yourself to brush your teeth and shower, you can train yourself to manage your money.

Step 7: Compound Your Results

Once you pay off your target debt you have a huge celebration and congratulate yourself. Then you move the stack repayment (which includes the previous minimum payment as well now) to the next debt with the highest interest rate. This becomes the new target debt and you’re using your stack repayment amount plus the minimum payment for the new debt.

This is why the stack method is so powerful. As you decrease a debt you actually increase your repayment amount. This means the second debt will get paid off even faster, the third even faster than that, and so on and so on until you are completely debt free.

Step 8: Be Kind To Yourself

During this process your resolve is going to be tested multiple times. Maybe you’ll have an emergency like your car breaking down or the need to travel for a sick relative. The important thing is to not throw up your hands in despair while going back to your old habits.

Life will test your commitment to your new responsible money attitude and it’s up to you how you respond. When things go wrong (and I guarantee they will) you need to shrug it off and get back on track. Show compassion when you accidentally go over your strategic spending plan and decide to do better next week.

How To Pay Off Debt Fast Using the Stack Method [Lifehack]

Craig Dewe is the founder of Lifestyle Outlaws, a group of like-minded people who believe in choosing to live your ideal lifestyle… not somebody else’s. You can connect and join for free if you’re looking toimprove your life and want a supportive community to help you on the journey.


  • I did this with our debts, concentrated on the high interest rates and highest fees first. Got rid of the Credit card first, Car loan next, and now the home loan is the priority, we are pooring money into our home loan as fast as we can (its an offset system so I can get money back quickly in an emergency) we now run prepaid credit cards, so we only spend what we put on them. That $200 a week I was using to service debts are now going towards paying off our house, and with the extra money going into our loan we should have our loan paid off in under 10 years.

    • Most offset facilities are packaged with a free credit card, using pre-paid cards is dumb because they have tons of fees.
      Pay the full balance of your card every month (set this up automatically with the bank) and you can have unlimited transactions that leave a higher balance in your offset – effectively earning you interest.

      So what if the bank calls people that do this “deadbeats”

      • Not really, my employer offers a prepaid card for staff with no fees and charges, so for me it’s much cheaper to have a prepaid card. My wife’s Card is also a prepaid but we don’t use that one very often, it costs us $1 to recharge it and 5¢ every time we use it, so far it has cost us $1.20 for the last 4 months we have had it. So in our case prepaid works out very cost effective. Works out nicely for us.

      • It’s funny when grammar nazis are wrong!

        (i’ve removed the irrelevant definitions from the list)

        Noun: effect (countable and uncountable; plural effects)
        1. The result or outcome of a cause.

        Verb: affect (third-person singular simple present affects, present participle affecting, simple past and past participle affected)
        1. (transitive) To influence or alter.

        In future to test if you thet are used correctly you should replace “effect” with “outcome” or “result” and replace affect with “influence” or “alter” while reading the text.

    • God this site is annoying. When I log into your site please just leave me on the page I am on as I am quite capable of finding replies to comments by myself. It would also be nice to be able to reply to a post with out having to switch to IE..

      Now what I logged in for,
      I just used this site above and I am unsure if it was the best thing or the worst thing..
      On the plus side by paying $200 more then minimum repayments I can clear everything in 2 years.. that probably sounds horrible but I have been in debt for 12 years as I am probably the worst at managing finance ever. However I just found out how much I owe and how much I spend in interest and that sucks..
      Doing all this barely leaves enough to live off, so not sure how I am going to stick with it and that is always my down fall..
      I set up automatic payments until 08/2014 to cover all my credit based of the payments that the site projected, and have a daily scheduled payment of 16$ to another bank account for spending money..
      I dis joined my credit card from my savings account so that I can’t transfer cash over and also changed my pin on both credit cards so I can not pull money out of them..
      anyone got any more ideas for something that I should try.. I really would like to get out of debt but I am really not good at managing money..
      I lost my job a year and a half ago and now earn $16,000 less then I did before so it makes it near impossible to make all payments.

      • Don’t lose hope. You’re doing really well!

        And seriously, what’s the alternative? Just don’t think about it and live in debt for the rest of your life? You’ll never get anywhere that way.

        I know how it feels. We’ve had so many family and house emergencies this year, we maxed out 1 credit card and started using the 2nd. Was really worried. But now, we’ve just cleared the 2nd and are making big inroads into the first. It feels good. Frustrating, working so hard just to clear interest, but at least we can see the numbers getting smaller.

        So keep it going. And soon, you’ll have the real money, of your own, to buy the things you want. And that will feel sweeeeeeet.

  • I have listened to Dave Ramsey’s advice on this and although the stack method you mention here of listing them according to interest rate is “mathematically” the best way of doing it, one consideration is that most people in debt are there because of behaviour not head knowledge. As he puts it “it you’re so good at math why are you in debt”.

    His approach is the snowball, list all debts according to the total balance and start with the smallest first, this way you have some small wins straight away and every time you clear one debt you have an extra payment to put into the next and work your way up. Also if you can’t clear a car loan within 18 months, sell the car and buy a cheaper one.

    Time magazine found that this snowball method was far better at changing peoples behaviours and on average people got out of debt faster.

    Just some food for thought. If you’re like me and needed a major paradigm shift to change your habits the snowball worked as it was exciting to watch every month my debts one-by-one dropped off, kept me motivated and now I’m on track for an early 50s retirement with several million in my nest egg.

    Neither is right or wrong its what works for you.

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