There’s No Wrong Way to Pay off Debt
One of Grayson’s big desires for Debt Roundup is that the site helps people learn how to pay off debt. There are a vast number of resources on the whos/hows/whats/wheres and why’s of paying off debt here at Debt Roundup and elsewhere on the Internet. Within the world of personal finance blogs, you’ll often find differing thoughts and opinions on the best method of paying off debt. Grayson shares how well the Debt Avalanche worked for him, while others share their successes with the Debt Snowball. Then there’s those in between, like me. We used the Debt Avalanche for the first two years of our debt payoff, but as of January 1st of this year, we’ve switched to the Debt Snowball. Sometime it’s hard to know which way to go and which methods to use when paying off debt. Today I’m going to go over some of the basic “why’s” behind the different methods you can use to pay off debt, as well as sharing the most important aspect of debt payoff.Not sure which debt repayment system to use? Here's the most important part of paying off debt! Click To Tweet
The Debt Avalanche
This is by far Grayson’s favorite method of debt payoff. It worked well for him and it’s worked well for countless others. Paying off debt by using the Debt Avalanche means listing your debts according to interest rate, the highest rate being at the top of the list, and paying the debts off starting with the highest interest rate credit card or loan, working your way down to the lowest rate card or loan.
One of the reasons Grayson loves this method of paying off debt is because it’s the method that will save debtslayers the most money. If you’re looking at sheer numbers, from a math perspective the Debt Avalanche makes the most sense. You’ll get out of debt sooner and save more money on interest by paying off debt. The Debt Avalanche takes the emotion out of debt payoff, and gets you debt free quicker and cheaper.
Grayson’s note: The avalanche method still involves emotions as you have to stay motivated during the payoff period. It’s long for many, so creating milestones to keep your emotions in check is the way to go. This is especially true if you have large balances with high interest rates like I did.
The Debt Snowball
The Debt Snowball method of paying off debt involves listing your debts in order of lowest to highest balance. You pay off the lowest balance card or loan first, and then move on to the next lowest card, taking that minimum payment from the first card and applying it as an additional payment toward the second card. You then continue snowballing the payments as you pay off more and more loans.
The Debt Snowball, from a numbers perspective, is going to cost you more money, however the snowball method works for a large number of borrowers because of the added incentive people often get to keep paying off debt when those smaller loans and cards get paid off.
This is why my husband and I chose to switch to the Debt Snowball. We started with a LARGE amount of debt, and although we did payoff debt during our first two years on the Debt Avalanche, the overall numbers were still big, and we were starting to get discouraged big time. Out of fear we might give up altogether on paying off our debt, we switched to the snowball, focusing on only one debt at a time (the smallest), and making minimums on the rest. Aside from making the minimum payments, though, we chose to put those other debts “out of sight, out of mind”. By using this method, we are finding that we’re more motivated, more encouraged and that we’re spending less and paying off debt faster. Although we are likely paying more interest in the long-run, the risk of going AWOL on our debt payoff plan was too big for us, and we needed to do something to change our plan that would help ensure we stay on track. The Debt Snowball was it, and it’s working.
Debt consolidation is also an option for getting debt paid off. By consolidating your loans and cards into one single loan with one single payment each month, the focus to become debt free stays strong, knowing that once that one loan is gone, you’re done and debt free. Debt consolidation, however, comes with a risk: the risk to start using those credit cards that you paid off by consolidating everything. If you haven’t changed your mindset and resolved to get and stay debt free, the debt consolidation method of paying off debt can easily lead to more debt, not less, if you start using those credit cards again without a plan to pay them off each month. Many a debt free person, my husband and I included, have reached debt freedom, only to be back in debt again because we hadn’t changed our mindset about having debt. If you’re still struggling with temptation to use credit cards, the debt consolidation plan probably isn’t for you.
The Take Away
The most important aspect of debt payoff, however, isn’t which method you choose to pay off your debt. It’s that you do indeed pay it off and don’t go back into debt. Try one plan, try all of the plans: just make sure you keep doing what you need to do and working your debt payoff plan (or plans) until debt freedom becomes a reality. Reaching debt freedom, whichever plan you use, means you have indeed succeeded at your plan, and the Debt Roundup team is here for you, every step of the way.
Which debt payoff plan worked or is working for you? How has your debt mindset changed in recent years?