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Ahh debt… that super annoying pesky little thing that you can’t seem to get rid of. Every month goes by and you seem to pay it off, but somehow pick up more at the same time?! You know repaying debt and getting your credit score up are essential, because if you don't it can seriously affect so many areas of your life, but where do you start?!?
Well today I wanted to answer a highly requested reader Q:
How the heck do you pay off debt?
What’s the best way to tackle debt repayment?
Where the F should you start when getting rid of your debt?
Today we are going to tackle two debt repayment methods: The Snowball Method and The Debt Avalanche Method
Debt Avalanche Method:
You list out all of your debts by highest interest rate to lowest:
Store #2 credit card $300 — 25% interest rate
Different regular credit card $2,000 — 18% interest rate
Store #1 credit card $225 — 20% interest rate
Regular credit card $1,800 — 15% interest rate
Student loans $20,000 — 5% interest rate
Dentist $25 — No interest rate, just pay before it hits collections!
Again, you’re going to look at the monthly minimum payment on all of these accounts and that amount becomes a fixed expense in your budget. From there, you may want to put any excess money from your paycheck to the debt with the highest interest. This allows you to get to the principal (original debt) quicker rather than throwing money at interest – meaning you’ll pay less money over time. Sound great, right?
Well the issue with the Debt Avalanche Method is that it doesn’t take into account our emotions and motivation levels as human beings!
Stick with me – have you ever been to the gym for two weeks and felt great… but then you weren’t really seeing the results you thought you should? And people weren’t noticing like you hoped? So you start skipping the gym… and before you know it you’re not going at all!
Yeah – that tends to happen with the Debt Avalanche Method. Which is why so many people have flocked to The Snowball Method.
The Snowball Method:
Coined by Dave Ramsey, basically it has you list out you debts in order of smallest outstanding balance to largest. This does not take into account interest fees, type of credit (different types of credit have different impacts on your credit score) or anything else other than the total outstanding dollar amount.
List your debts from smallest balance to largest:
Store #1 credit card $225
Store #2 credit card $300
Regular credit card $1,800
Different regular credit card $2,000
Student loans $20,000
So the pros of this method mean that you will be able to start crossing things off this list fairly quickly. Meaning you’ll see your progress, and in turn the internal rewards system (you know the one, like when you go to the gym and someone tells you you look amaze so you want to keep going to the gym) keeps you motivated to keep on going with your debt repayment! The biggest con is that you will pay more money over time.
It should also be noted with this method, that the minimum payment due on any of the above accounts is a fixed cost non-negotiable. Meaning we don’t ignore the minimum monthly payment of the regular credit cards in order to pay off Store #1 just because it’s higher on the list.
Which do I recommend?
Well, I’m not a financial advisor (here’s some insight from Lexington Law on Credit Card Payoff Strategies), and every person has a different financial situation, so what I typically tell people who ask me this, is to be really honest with yourself and your spending habits. If you’re someone who can easily stick to a long term goal without seeing progress, then the Avalanche method 100%. If you’re someone who tends to splurge on a new pair of shoes when you’re having a bad day, probably do The Snowball Method.
If you’re feeling up for it – and it isn’t too complicated for you – you can always try a hybrid! For example, start with your smallest outstanding balance first (Snowball) then jump to your highest interest rate (Avalanche) then maybe you tackle two of your smallest payments (Snowball), and then your next highest interest rate. Again, try to keep it simple and just know what works for you. Ultimately you'll pay less overtime with the Avalanche method, but you may loose motivation along the since it may take a little longer to finally cross one of your debts off the list (which is why people love the Debt Snowball, they can cross things off faster). If you’re still feeling stuck, talk to a financial professional like my friends over at Lexington Law who specialize in credit repair!
Final Note on Debt Repayment:
Alright, so like I mentioned above, the monthly minimum payment for each of your outstanding debts should be a fixed cost in your budget. From there, you’ll also want to automate those minimum payments so you never miss one!
These are just two debt repayment strategies. If you're looking for more tips on eliminating credit card debt, check out this article from Lexington Law. And remember, as scary as it is to get started repairing your financial situation, paying off debt feels good!