3 Popular Debt Payoff Strategies You Should Consider

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.

There are several debt payoff strategies to choose from. Here are 3 popular ones you might consider to help you with paying off debt.

Debt Snowball

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.

Debt Snowflake

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!

Debt Avalanche

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

How to Manage Your Student Loan Debt

As weird as it might sound, we had a lot of fun talking about student loan debt in the last episode of Financial Conversation.

It’s a topic we’re all too familiar with, as we’re sure many of you are.

Why is that? A staggering 7 in 10 seniors who graduate college are burdened by student loan debt. The total student loan debt in America is a whopping $1.3 trillion.

If that wasn’t crazy enough, there’s even a real-time “student loan debt clock” available so you can watch the total climb higher and higher.

All right, enough with the stats. If you’re like us and are feeling overwhelmed with your student loan debt, and haven’t listened to our podcast (where we share some of these awesome tips), then read on.

Want to learn how to successfully manage your student loan debt so it doesn't feel like you're drowning in it? Here are 5 tips that will help you.

Get Comfortable With the Numbers

Many of our peers are unaware of exactly how much student loan debt they have. That’s not going to help you. We know it’s hard to face the numbers, but that’s your first stop in taking control of the situation.

If you have federal student loan debt, you can visit the National Student Loan Data System for Students. You just need your FAFSA ID to access your account, but if you forgot it (we won’t tell anyone), you can easily reset your information.

This will give you your total balance across the board, even if you have multiple student loan servicers.

Do you have private student loans? The easiest way to find your balance is checking your credit report, which you can do for free at annualcreditreport.com. Your debt totals should appear there (along with any other debt you may have, like credit card debt).

Create a Debt Payoff Plan

Now that you’re armed with numbers, you can continue to create a plan to pay off your student loans once and for all.

If you’re determined to kick them to the curb sooner than later, it might be good to know that you can pay them off early without a penalty. Being paid ahead is great!

The easiest way to tell if you can pay extra toward your loans is to see how much money you have left at the end of the month, after all your other necessary expenses.

It helps to have a budget created, but if you don’t have one, that’s okay. By tracking your spending, or using software like Mint or Personal Capital, you can compile your expenses together.

Grab your income, subtract your expenses, and see where you stand.

If you have money leftover, can you dedicate a portion of that to your student loans?

If you don’t have anything leftover, then it’s time to evaluate your spending habits so that you get closer to being in the black.

Can’t Afford Your Student Loan Payment?

Many young adults are in the opposite boat and can’t afford their minimum student loan payment.

With lower salaries and a difficult job market, it’s not hard to figure out why. But what’s the solution?

If you have federal student loans, you actually have quite a few options available to you. Your first stop is talking to your student loan servicer about them. They can switch your repayment plan (if necessary) and grant you forbearance and deferment as well.

Not familiar with these options? We recommend checking out the official site of the U.S. Department of Education that breaks everything down. You might not be eligible for every single option listed there, but it’s worth investigating if you’re having trouble.

The last thing you want to do is miss a student loan payment, as that could make you delinquent on your loans. That means your credit score takes a hit. Defaulting on your student loans (not making a payment for more than 270 days) is even worse. Don’t let it get to that point.

What can you do if you have private student loans? Again, talk to your lender. They’re your point of contact throughout this, and it’s important to communicate with them so that if something does happen, you have it on record you reached out to them.

Some private lenders are able to grant forbearance, and some may let you skip a month of payments. While it’s not recommended (as you’ll have to make it up somewhere by paying more in interest!), it can be used as a last resort.

You can also look into refinancing your student loans at a lower interest rate, but this is not a one-size-fits-all solution, nor is it a cure-all for your student loan woes.

Why? If you refinance federal student loans with a private lender, you lose all of the federal benefits like deferment, forgiveness, and Income-Driven Repayment plans.

So while you may save money by lowering your interest rate, be aware that there are trade-offs!

Try Focusing on Earning More

We’d be remiss if we didn’t mention focusing on earning more rather than cutting back. While we’re all frugal in our own ways, there’s a reason we became freelancers.

Most of us found that we were getting paid more (aka: what we are worth) by paving our own way. There’s only so much you can cut back on, but earning more is (theoretically) unlimited.

If you’re having trouble finding a decent-paying job (or any job at all), try freelancing. Think about creative ways you can earn money from your hobbies or skills. People are willing to pay for a lot of things these days, and freelancing online provides a lot of flexibility!

Don’t Give Up

It’s incredibly difficult to discharge student loan debt in bankruptcy. Don’t fall for anything you might hear about getting your loans magically forgiven or discharged.

There are a few scams going around that target graduates. If it sounds too good to be true, it likely is. Do your own research and figure out the options available to you so you can conquer your student loan debt once and for all.

Have a Laugh at Our Bloopers

We know, talking about student loan debt isn’t usually fun or cheerful, but we try our best. Give our bloopers a listen if you need a pick-me-up!