Paying off debt is a very personal aspect of personal finance, but it’s one that we discussed and tackled head-on in this week’s episode of the podcast.
Erin, Chonce, Kayla, and guest Kara discussed several debt payoff strategies that can be used to help you get out of debt in the fastest way possible, or with the most motivation possible.
Ultimately, we decided that while not everyone will choose the exact same option of the 3 popular debt payoff strategies listed below, the most important thing is that you continue to make progress at paying off debt and that you do whatever works best for you.
Not sure what that is yet? Check out these 3 popular debt payoff strategies to help you get started paying off your debt today.
The debt snowball is one the most popular debt payoff strategies thanks in large part to financial guru Dave Ramsey. This is the method he recommends to people who take his class, Financial Peace University.
Although there are other debt payoff strategies that can save you more money in the long-run on interest, like the debt avalanche listed below, the debt snowball is a popular strategy because it can really help people stay motivated while paying off large amounts of debt.
Here’s how it works.
The debt snowball is Baby Step 2 in Dave’s plan to get you financially secure. It comes after Baby Step 1, which is saving up a $1,000 mini-emergency fund.
With the debt snowball, you list your debts in order from smallest balance to largest balance while ignoring other factors such as their interest rate and minimum payment amount.
You will pay only the minimum payment on all the debts except the smallest one, which you will attack with “gazelle intensity”.
Once that debt is paid off, you take the money you were putting toward that debt and use it to help pay off the next debt on your list by combining it with the minimum payment you were already paying on that debt.
The further you get down the list, the larger the amount of money you will be putting toward the first debt on your list, thus the debt snowball will grow as it rolls downhill. Plus, the small wins you get at the beginning by paying off the small debts quickly will help you stay motivated and make you feel like you are really making progress at getting out of debt.
The debt snowflake method is a spin-off of the snowball method. If making super large, extra payments toward your debt isn’t doable, don’t worry. You can use the snowflake method to gain momentum.
The way it works is simple: you sprinkle in extra debt payments throughout the month. It doesn’t matter how much you can afford to put toward your debt – $5 here, $10 there – it adds up. So if you can only put $10 extra toward your debt one week, that’s fine. Maybe next week you can increase it to $20!
Any “extra” cash you get, whether it be a gift, or money you found on the street or in your pocket, should be used this way. The point is to get into the habit of making these extra payments, and to feel good about it.
Again – these amounts will add up over time! This is a great solution for those who get paid irregularly and can’t say for sure that they can put $X extra toward their debt per month. As Kara said in our podcast episode, each payment should feel like a small victory. You’re getting there!
The debt avalanche method of paying off your debt involves taking your highest interest debt and paying if off first, then moving on to the next account with the highest interest rate, and so on. By doing this, you may not see positive results right away since you may not be paying off the smallest balance first, but you will ultimately minimize the amount of interest you have to pay over time which allows you to save more money in the end.
For example, if you have credit card debt, a car loan, and student loan debt, you’ll probably want to pay your credit card debt off first if the interest rate is highest regardless of what the balance is. Interest is accrued on your debt daily so borrowers who choose to use the avalanche method can help reduce how much money they pay on interest by knocking out their high interest debt first.
With this strategy, you have to be very motivated to pay off your debt because there may be some months where you don’t see your progress or feel like there wasn’t much progress made at all. Even if it takes you a few years to pay down your debt though, you can do the math and see how much you saved by using this method to pay off your debt.
Bonus: Hybrid Method for Paying Off Debt
Sometimes the best method for paying off debt is using a combination of the three methods listed above. For example, when I (Kayla) first started paying off debt, I used the debt snowball so I could feel an immediate win by paying off two small debt balances I was carrying. However, after those two small balances were gone, many of my debt had balances that were within $50 of each other but vastly different interest rates. At this point, I decided to switch methods and use the debt avalanche to help me save money on interest by paying off my highest interest debt next. Switching methods or making up your own method is fine as long as you continue to make progress at paying off your debt.
Listen to the Bloopers!
Are you currently paying off debt? Which of these debt payoff strategies have you used to help pay off debt?
-Erin, Chonce, and Kayla