Back in 2016 order Lyrica from canada when I started tackling debt, I had only heard of one method up until that point on the best way to tackle debt called the debt snowball method. At the time, it made sense to me and since I hadn’t heard of anything else, I started tackling my debt with that plan in mind.
However, since starting on my journey, I’ve discovered that there are some other popular ways to slay debt. Since I get asked the “where do I start” question a lot, I thought it would be helpful to lay out some of the methods I’ve learned about over the past two years and nine months, to help you decide on which approach would be the best option for you.
Before we get started, however, in all instances of trying to tackle debt, you should really strive to have an order Latuda over the counter emergency fund in place BEFORE you take on debt! If you don’t have an EF, this should be your number one priority. You’re just asking for problems by paying off debt first with no emergency fund in place. Think of it this way, if you have a $500 debt that you throw all of your money at and are left with ZERO in the bank and then WHAM!!!! The next day, an emergency comes barreling through, you have ZERO dollars in your bank account because you just put it all to debt. Now you’re stuck scrambling to come up with $500 bucks to cover what just happened which inevitably causes a lot of us to go back into the cycle of going into debt to cover the expense.
A big part of tackling debt also requires that you DO NOT accumulate anymore along the way while you’re trying to clean your debt up. That means you’ll need to pass on putting those expensive shoes on a credit card, treating your credit card like an emergency fund, and it also means, not borrowing any more money from any type of lending source (friends, family, the bank, car dealership, etc.).
Debt Snowball
One approach you can consider if you’re looking for ways to hit the ground running is the debt snowball. The debt snowball is when you pay off your debts from smallest balance to largest balance regardless of the interest rate. This method generally assists with the psychological aspect of paying down debt because it help’s a person maintain momentum through small wins as it relates to their debt. For example, let’s say you have $20,000 of debt that is comprised of the following:
- $1,500 Credit Card (Chase)
- $7,800 left on a Car Loan
- $900 Credit Card (MasterCard)
- $9,800 Student loan
Using the debt snowball method, the first debt that should be paid in this example is the $900 MasterCard. When you’re looking at a total of $20,000 of debt, especially when you’re first starting out, it’s always nice to see that you’ve at least made some measurable progress fairly quickly and early on. Whether it be $10k or $100k any amount of debt can seem overwhelming at first to take on.
Even if you have the cash sitting in your account, writing a big fat check to pay off your debt is, umm idk, scary? I know when I had to write a check for $29k and get it from the bank for my largest student loan it was the largest “purchase” of my life. Even the guy at the bank was like “wow, this is a pretty big check,” I sighed and said, “yeah” meanwhile everything in me was screaming WTF are you doing.
How does it work?
You make the minimum payments on all of your debts except the smallest one. On the smallest debt, you will throw as much money as possible at it (beyond the minimum) each month until it’s paid off. Once it’s paid off, you continue to work your way down your list of debt, applying the money you were throwing at your former smallest debt towards the next debt on your list. Take a look at the example below:
1.) Order your debts smallest to largest regardless of interest.
2.) Make the minimum payment on all debts except the smallest one on your list. Add any extra money you can find towards that debt each month until it is paid off. In this example, let’s say your MasterCard minimum payment is $35 a month; however, you recently got a little raise or cut the cable in order to tackle debt so now you have an extra $90 bucks to put towards debt each month.
3.) Pay more than the minimum on your smallest debt until it is paid off.
4.) Apply the money you were putting towards that first debt to your next debt and so on. For this example, once the MasterCard is paid off, you will have $125 on top of the minimum payment to put towards debt. Once your first debt is clear, you move on to the next debt on your list and continue to roll the money you were putting to your former debt into your next debt. For this example, the next debt would be the Chase credit card the payment will go to $160 ($125 + $35 min).
Paying off smaller debts helps people feel accomplished faster. The debt snowball is one of the most talked about and most prevalent methods implemented amongst my followers and is also the method I used (more or less) to get out of debt. However, this method may cost you a little more in interest, in the long run, depending on how much debt you have and how long it takes you to tackle it.
Debt Avalanche
Not feeling the debt snowball? Well similar to the debt snowball, the debt avalanche is an equally as popular method used to tackle debt. Unlike the debt snowball, however, the debt avalanche method organizes debts from the highest to lowest interest rate regardless of balance. This method is rooted more in logic, data, and numbers than it is in “quick wins”. While the “wins” (paid off debts) with this method may take longer to manifest, this method generally saves you on interest as it relates to your debt, in the long run.
Using the same numbers from above, the first debt you would look to pay off under this method would be your Chase credit card because it has the highest interest rate. By organizing your debts from highest to lowest interest rate, you’re stopping the interest on that debt from snowballing further.
How does it work?
You make the minimum payments on all of your debts except the one with the highest interest. On the debt with the highest interest, you throw as much money as you can, beyond the minimum payment, at the debt until that debt is paid off. Then you use the money you were applying to the highest interest debt to pay off the next highest interest debt on your list and so on. Take a look at the example below:
1.) Order your debts from highest to lowest interest rate regardless of balance.
2.) Make the minimum payment required on all debts except the highest interest rate debt on your list. Add any extra money you can find towards that debt each month until it is paid off. In this example, let’s say your Chase minimum payment is $35 a month, however, you’ve recently been granted work from home privileges at your job, so you’re now able to save $90 a month on gas/commuting cost.
3.) Pay more than the minimum on your highest interest rate debt until it is paid off.
4.) Apply the money you were putting towards that first debt on your list to your next debt and so on. For this example, once the Chase card is paid off, you will have $125 on top of the minimum payment to put towards your Car Loan. Once your first debt is clear, you move on to the next and continue to apply that money to your next debt, so now your car loan payment will increase by $125 for a total of $375 towards your car each month.
Unlike the debt snowball, there may not be any quick wins with this method, but at least you are saving on the ballooning interest payments in the long run. This, in and of itself, can give you some comfort because your repayment method is based on cold hard facts and figures rather than instant gratification and emotion.
Large Lump Sum
Neither of those options sounds appealing? Well, there is another method I’ve heard through the grapevine that may work for some people called the lump sum method. This method is when you pay the minimum on all your debts while saving a large lump sum of money to pay towards or pay off debt one at a time. The order in which you prioritize your debts is strictly up to you, but this method sometimes works for people with an unsteady stream of income or for those of us that like the idea of having some type of safety net or fallback plan.
Usually, the lump sum that is being saved simultaneously acts as a safety net if/when any of irregular income plans get derailed (invoices aren’t paid, haven’t been able to get a gig, a check is less than expected, etc.). I really look at this method more as DEBT MANAGEMENT rather than DEBT TACKLING. I think this approach is mainly psychologically based as well because it provides you with a false sense of safety but “safety” nonetheless.
How does it work?
Let’s say you want to use a combination of the debt snowball and lump sum method because you’re a freelancer who wants to pay off debt but doesn’t have a steady income.
1.) You list out all of your debts smallest to largest regardless of interest.
2.) All of the extra income you earn over the minimum payment you put to an account you deem to be your “lump sum payoff” account. You decide if, at the end of the month or every quarter, you take whatever you’ve saved over the minimum and make a large payment towards your debt.
For example purposes, let’s say you decide to make large payments every quarter until your income steady’s out. At this point, using the example above, you’ve been able to save $500 in your lump sum payoff account (outside of an emergency fund). In instances where you have an emergency fund in place, which honestly that should be the first thing you work, tackling debt should be next, then you want to proceed to step 3. If you don’t have an emergency fund in place, use this “lump” sum of money to get one. Fund this account until it’s fully funded then move on to step 3.
3.) Take your lump sum money and make a large payment towards the smallest debt and so on until the debt is paid off.
If you run into an issue where you’re emergency fund doesn’t fully cover your “emergency,” and you have a lump sum money sitting in your lump sum account, you may be able to rely on this cash in the interim. If you do use it and skip out on making a large payment towards debt at the end of a quarter, you’ve essentially paused your debt tackling. I say that because if a person is ONLY paying the minimum towards debt and I get it, sometimes that’s all someone can do, then they aren’t really tackling debt, they are just paying it off in the same old way most people do.
The lump sum method in the long and short term may give you the WORST of both worlds, no real immediate wins and you’re paying interest that you don’t need to be BUT it does provide you with a level of comfort knowing you have cash on hand. Again, if you aren’t implementing a method that can clear up a large portion of your debt in a relatively short period of time, like 2-3 years, then you aren’t really tackling debt, all you’re trying to do is manage it better.
Managing debt rather than trying to get rid of it for good, comes with its own issues and problems but that’s for another day and topic. Either way, getting rid of debt is a MUST if you want to build wealth and set yourself up for financial independence. Experiment, figure out what works best for you both mentally and financially, and get after it!
Other Post You Might Like:
Subscribe
To receive 14 Free Budget Sheets and emails on the latest and greatest from Make Real Cents!
DJ @ Pennies To Wealth says
I am SO glad that you led with saving up an adequate emergency fund. You know Dannie and I are BIG on that because we hate when people talk about putting all of their money towards debt and then struggling when an emergency hits.
Because we ALL know, emergencies will happen no matter what you do. Great post Carmen!