Tackle High-Interest Debt with the Stack Method

by Craig Anthony

1 min read

If your small business has multiple loans, one strategy you can use to pay down your debt is the debt stack method. Using this strategy, you list your debt in order of the interest rate being applied to the debt. Your strategy is to pay the debt with the highest interest rates regardless of the balance you owe or the minimum payments you owe. The stacking method is a way to help you pay the least amount of interest. By targeting the debt with the highest interest rates, your principal balances with the highest costs are reduced first.Let’s pretend you have three loans with balances of $1,000, $5,000, and $10,000. The interest rates are 10%, 7%, and 5% respectively. Using the stacking method, you would pay the minimum payments on each loan each month. Then, with any extra cash you wish to use toward paying down your loans, you would start by paying off the $1,000 loan. Even though this loan has the smallest balance, it has the highest interest rate.The stacking method doesn’t consider your cash flow needs or capabilities. It also does not account for the minimum payments you are making, but whatever you are able to pay off early earns an effective rate of return. If you pay off your business loan with a 10% APR, you are effectively earning a 10% return on your money because you are saving this amount in interest and fees. When planning to pay off your debt, consider using the stacking method. This approach reduces the amount of interest you pay in the long-term and saves your company money.

References & Resources

Related Articles

Get Paid On Time The Complete Guide to Invoices

For freelancers and self-employed people, invoicing is an essential part of your…

Read more

Checklist Before Leaving Your Job to Become Your Own Boss

So you’re thinking of quitting your job to become your own boss. In other…

Read more

What’s Changed in the New QuickBooks

The new QuickBooks Online bookkeeping software has gone through quite a few changes. As…

Read more