My debt load is crushing my finances! I need relief!

Do you have debt? You may be thinking, “What a dumb question. Of course I have debt. Doesn’t everybody?” Yes . . . and no. Roughly 75% of all Americans have debt, so you’re definitely not alone. But that leaves a quarter of all Americans that are debt free. Wouldn’t you rather be in that group? Would you like to learn how to pay down your debt quickly?

How to Pay Down Your Debt.

The best debt repayment plan is the one that works. There are two methods that almost all personal finance experts recommend. They are the snowball method and the avalanche method. Before we discuss these two methods, let’s talk about debt in general.

Why should you want to pay down your debt? Can’t I use debt as a tool? No! Please stop thinking this way. You are forgetting about risk! The longer you keep your debt around, the more you cripple your potential for future financial success. Remember compounding interest? It can work against you too – with debt.

So what’s the best way to finally get rid of that pesky debt?

The Snowball Method

Using this method, you start by listing all your debts in order by balance from smallest to largest. You stay current on all your debts by paying the minimum payment on each debt except for the debt with smallest balance.

You throw as much extra money as possible at this tiny debt. This extra money is called your snowball amount. Obviously the larger your snowball amount, the quicker you can pay down your debt.

Once you pay off the first debt, you take your snowball amount, and the minimum that you were paying on your first debt, and put all that money towards your next smallest debt. And you continue ‘snowballing’ each debt until all your debt is gone. After each debt is paid off, you’ll have more money to put towards each subsequent debt, thus building your snowball bigger and bigger.

Pro:

You get a few quick victories in the beginning, and keep morale and determination high. This attitude usually leads to paying down debt even quicker.

Con:

You may pay more in interest, because this method doesn’t consider interest. Only the balance matters. For specific situations, such as high credit card debt (usually high interest rates) compared to other debts, this method may be a poor choice.

The Avalanche Method

This method is similar to the snowball method. The difference is how you attack your debts. Start by listing all your debts in order by interest rate from highest to lowest. You stay current on all your debts by paying the minimum payment on each debt, except for the highest interest rate debt.

Then, you throw as much extra money as possible at this high interest rate debt first. This extra money is called coincidentally, your avalanche amount. Just like with the snowball method, the larger your avalanche amount, the quicker you can pay down your debt.

Once you pay off the first debt, you take your avalanche amount, and the minimum that you were paying on your first debt, and put all that money towards your next highest interest rate debt. And you continue ‘the avalanche’ burying debt until all your debt is gone. After each debt is paid off, you’ll have more money to put towards each subsequent debt, thus increasing the speed of your avalanche.

Pro:

You will save the most money by paying the least amount of interest. This is mathematically the best option, but . . .

Con:

break the chains

Most personal finance problems can be solved by changing behaviors. This method does not incorporate behavior rewards. It can be challenging to stick with it if your high interest rate debt also has a large balance.

Conclusions

There’s a great tool to compare the difference between the two methods for your specific situation. Try it out and let me know what you think?

Un-Debt-it calculator

I would personally choose the snowball method for most situations. When it comes down to it, most personal finance advice is simple. We all already know what to do, we just don’t do it. A “fancy new scheme” is not going to get you out of debt quicker. Your attitude and behavior matters more than your method of choice.

No matter what method you choose, you will only succeed if you stick with it. Pick a plan, and start to pay down your debt. You can do this!

Do you have debt that you’re either “snowballing” or crushing under the weight of an “avalanche”?

Let me know in the comments, and thanks for reading and sharing!

Author

Chris is the original Cash Dad. He's a father of 3 and a mechanical engineer by trade.

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