Being in debt is difficult, and if you’re in debt, you likely agree. Being in debt can be overwhelming and make you feel like you just can’t gain any traction. Are you ready to make some major changes to your finances and get out of debt once and for all? There are many different debt repayment methods, but three of them stand out as some of the most effective ways to get out of debt.
The Best Debt Repayment Methods
Sure, there are more than just three debt repayment systems, but let’s be honest, you want to pay off debt FAST, right? Constantly shuffling a few bucks on this credit card and a few bucks on that loan (on repeat) each month will just serve to keep you in this constant cycle with no end in sight.
And sure, if you stay consistent and steadfast, you will likely get out of debt at some point in your life, but newsflash: you weren’t born just to work and pay off debt!? While it is important to remember that fixing your finances requires a lot of patience, time, and hard work, having a plan and taking action will help you get your debt paid off and take back control of your life.
Debt Snowball Method
Pro: This method will keep you motivated along your journey. It serves up quick wins and really helps you get some serious traction during the process.
Con: You may end up paying extra money in interest with this method since you’re paying off the smallest balance first (even if it has the smallest interest rate as well), and the debt with the highest interest rate might end up last on your debt priority list.
How it Works
The Debt Snowball System works by taking all your debts and listing them in order of balance – least through greatest – with #1 being the lowest balance and working your way up. With this method, you only focus on one debt at a time.
You will always make the minimum payment on all of your debts each month but will only focus on paying off one debt at a time. Channeling all your focus solely on one debt allows you to clear that debt considerably quicker than if you were working to pay them all off at the same time.
Pay it Off
After you pay the minimum on all other debts, you take all the extra money in your budget and put it all toward the debt you’re focusing on. Repeat this process each month, putting every dime you can find on the debt you’re focusing on until it is paid in full. Congratulations, you just paid off your first debt!
Debt Avalanche Method
Pro: You can save a few bucks in interest with this method. How much, however, completely depends on your balances, interest rates, and how fast you can clear all of your debt.
Con: It can take much longer to see substantial progress, resulting in impatience and frustration.
How it Works
Using this method, you will be clearing the debts first that are accruing interest at a higher rate. This method may be best for you if you don’t have as much money to put toward repaying debt. The actual steps you take when repaying the debt are still essentially the same.
You will order your debts beginning with the highest interest rate and going to the lowest, but you will pay them off using the same steps we outlined in the debt snowball method. Make the minimum payments on all debts each month and put any extra money toward the debt with the highest interest rate until it is paid in full. Work your way through each debt until they are all paid off.
Remain Focused on the Big Picture
The debt avalanche method is a favorite for many, especially people who tend to be more focused on the details. You may feel more accomplished if you are saving a bit extra in interest over the length of time it takes you to become debt-free. Though, in many cases using the debt avalanche system only results in minimal savings.
Yes, becoming debt-free as quickly as possible is preferred, but you must remain focused on the big picture. Remember, this is a marathon, not a sprint. You may save a few hundred dollars in interest, but if that means you end up staying in debt a year longer, that doesn’t seem to make much sense in the long run.
Highest Payment Method
Pro: This may be helpful if you are extremely strapped and have virtually no money to put toward debt each month.
Con: Depending on the size of the debt (as pictured below in our example chart), it could take a great amount of time to pay off your first debt, still leaving you with very little money that entire length of time.
How it Works
As in the previous two methods, the steps will remain the same, but you will pay off your debts by first paying off the balance with the highest monthly minimum payment. The logic is that paying your debts in this order will free up more money in your budget each month.
This isn’t often the preferred method, but it has its advantages in certain circumstances. Plus…who doesn’t love options? The bottom line is that you must determine the best method for you, which may not necessarily be the best method for someone else.
Here’s the Deal
Debt is a very personal subject, so it can be tough to reach out for help and advice. Take a look at these methods and determine which one is the best fit for your current financial situation. Get on a budget right away, stop using credit cards, build a starter emergency fund, and switch to a cash payment system. Work hard and work fast.
The most important thing is that you get out of debt, regardless of the method. Debt will continue to keep you from being free and fully enjoying your life but only for as long as you allow, so don’t wait any longer.
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