How to Tackle Your Debt with a Ready-to-Go Strategy
Consider these two strategies for eliminating your debt
If you’re tired of being stuck in debt, now’s the perfect time to consider prioritizing debt repayment in your expenses. In fact, accelerating your debt-free journey could save you not only years of repayment but potentially significant sums of money you would have paid out in interest costs.
Best of all, you don’t have to do any complex number-crunching to get started. Here are two ready-to-go methods to consider for tackling your debt.
What is accelerated debt repayment?
Sound debt repayment strategy starts first with paying the minimum amounts owed on each outstanding debt. But if you’re looking to get out of debt rapidly, the secret is paying more than those minimums. In fact, each of the strategies below involves paying a fixed amount of money above and beyond those minimums every single month.
Here’s an example:
Suppose you’re carrying debt on two separate credit cards. Card 1 has a $1,500 balance, a $30 minimum monthly payment, and a 15% interest rate. Card 2 has a $5,000 balance, a $120 minimum monthly payment, and a 25% interest rate. To keep your creditors happy, then, you’re required to pay at least $150 each month toward your debt.
Unfortunately, while paying just the minimums, you should settle in for a long period of debt. Card 1 will take 79 months (over six years) to repay, while Card 2 will take 99 months or more than eight years. And, in total, you’ll hand over more than $7,600 in interest alone.
So, in an effort to kick your debt sooner and pay less in interest, you commit to accelerating your debt repayment by adding an extra $100 each month to your debt payments.
But then the question becomes this: What’s the smartest strategy for where you should put that extra money each month? Should you put it all toward one debt, or should you divvy it up somehow across both cards? That’s precisely where these two popular debt repayment strategies come into play.
Strategy 1: The debt avalanche method
When using the debt avalanche, you focus that extra payment amount entirely on your highest-interest debt. Then, when you’ve driven that balance down to zero, you move the cash you were putting toward that card over to the debt with the next highest interest rate.
Here’s how it works in our example:
Since Card 2’s 25% interest rate exceeds Card 1’s 15% rate, you begin your debt avalanche by paying your monthly minimums and allocating your extra $100 payment each month entirely to the debt on Card 2. That is, you continue paying your $30 on Card 1 while putting $220— the $120 minimum owed, plus your extra $100 — toward Card 2.
As a result, the balance on Card 2 hits zero after just 32 months. With Card 2 paid off, you add the $220 you’d been sending to that card to your Card 1 payment. So now you’re paying $250 each month toward the remaining debt on Card 1. Card 1’s debt disappears four months later.
The end result is this: You’re debt-free after only 36 months and more than $2,300 spent on total interest costs. Because you employed the debt avalanche method, you’ve saved yourself 63 months of debt repayment and about $5,200 in interest.
Strategy 2: The debt snowball method
When using the debt snowball, you focus your extra payment amount entirely on your lowest-balance debt. Then, when you’ve driven that balance down to zero, you add the cash you were putting toward that card over to the debt with the next lowest outstanding balance.
Let’s go back to the example:
Since Card 1’s $1,500 balance is less than Card 2’s $5,000 balance, you begin your debt snowball by paying your monthly minimums and allocating your extra $100 payment each month entirely to the debt on Card 1. That is, you continue paying your $120 on Card 2 while putting $130 — the $30 minimum owed, plus your extra $100 — toward Card 1.
As a result, the balance on Card 1 goes to zero after just 13 short months. With Card 1 paid off, you add the $130 you’d been sending to that card to your Card 2 payment. So now you’re paying $250 each month toward the remaining debt on Card 2. Card 2’s debt is gone 25 months later.
The end result is this: You’re debt-free after only 38 months and about $2,700 spent on total interest costs. Because you employed the debt snowball method, you’ve saved yourself 61 months of debt repayment and about $4,800 in interest.
Which one should you consider?
Numerically, the debt avalanche gives you a leg up on the debt snowball method. Specifically, the avalanche allows you to pay the least interest possible and get out of debt the quickest. (In our example scenario, you can see that the avalanche method saved you two months and nearly $400 of interest.)
Of course, the debt avalanche will have you debt-free only if you stick with it. Paying off debt can be a long journey, and it’s easy to feel discouraged or even quit along the way. That’s why the debt snowball method focuses on delivering early successes. By quickly driving small balances down to zero, you see the quickest possible wins while building motivation to keep going.
So which method should you choose? If your willpower is rock-solid, consider sticking with the debt avalanche to minimize your time and money spent on debt. But, if you need that extra encouragement to keep going, or if you want to slash the number of debts you have as quickly as possible, consider the debt snowball method instead. Regardless of the method you choose, taking the first step to paying down your debt can help start the year off on the right financial foot.