Mastering Debt Repayment: How to Pay Off Debt Faster

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Debt can be a daunting four-letter word, but paying it off doesn’t have to be. If you’re determined to clear your debt quickly and efficiently while saving some money along the way, here are some effective strategies you can follow. Let’s explore how each strategy works and find the best fit for your financial journey.

Debt Snowball vs Debt Avalanche

When it comes to paying off debt, there are two popular strategies for paying off debt fast: the debt snowball and the debt avalanche. These methods are more effective than spreading extra payments thinly across all your debts. Here’s a deeper dive into how these strategies work and why they are beneficial.

1. What is the Debt Snowball Method?

The debt snowball method involves paying off your smallest debt balances first while making minimum payments on your other debts. Once the smallest debt is paid off, you take the amount you were paying on that debt and apply it to the next smallest debt.

This method helps you gain momentum with small victories, which can be highly motivating.

2. What is the Debt Avalanche Method?

The debt avalanche method, on the other hand, prioritizes debts with the highest interest rates first. By focusing on high-interest debts, you minimize the amount of interest you pay over time. Once the highest-interest debt is paid off, you move to the next highest, and so on.

A Practical Example

Let’s illustrate these methods with an example. Meet Brandy, who has the following debts:

TYPE OF DEBTBALANCEINTEREST RATEMIN. PAYMENTTIME TIL PAID OFFINTEREST PAID
Credit Card 1$9,607.9313.24%$17884 months$5,171
Credit Card 2$1,953.3315.99%$8927 months$373
Student Loan$7,733.784.25%$79.02121 months$1779
Car Loan$12,000.005.61%$47927 months$793
TOTALS$31,357.54$825.02121 months$8,116

1. Paying Minimum Payments Only

Right now, Brandy is only paying the minimum payments for each debt. Like most people, once Brandy pays off a debt, the money she was applying to that debt payment will be reallocated to some other area of her budget while she continues to pay the minimum payments on the remaining debts.

If Brandy pays only the minimum amounts each month, it will take her 121 months (10 years and 1 month) to clear all of her debt (with the student loan taking the most time), and she’ll pay $8,116 in interest on top of what she originally owed.

2. Applying the “Divide & Conquer” Method

Many people who are trying to pay off their debt faster will use what I like to call the “divide and conquer” method. It is when you take whatever extra money you can apply to your debt, and you divide it equally across all of your debt payments in an attempt to pay all of your debt down faster.

If Brandy has an extra $100 a month to apply to her debt, and she uses the divide and conquer method, Brandy would divide the $100 into 4 (because she has 4 debt payments) and add an extra $25 to each of her 4 minimum payments. You can see how her debt payments would change in the table below.

TYPE OF DEBTBALANCEINTEREST RATEMIN. PAYMENT + $25
Credit Card 1$9,607.9313.24%178+25 = $203
Credit Card 2$1,953.3315.99%89+25 = $114
Student Loan$7,733.784.25%79.02+25 = $104.02
Car Loan$12,000.005.61%479+25 = $504
TOTALS$31,357.54825.02+100 = $925.02

Using the divide and conquer method would allow Brandy to pay off her debt in 87 months and pay only $6,414.30 in interest. With an extra $100, Brandy is able to pay off her debt almost 3 years (7 years and 3 months) faster and save $1,701.70 in interest!

But what if I told you that Brandy could use that same $100 and cut her debt payoff time in half just by applying a different strategy?!

3. Applying the Debt Snowball Method

Remember, the debt snowball method involves paying your debt off in order from the smallest balance to the largest balance. In Brandy’s example, she would add all of her extra $100 to the smallest debt first (Credit Card 2) while continuing to pay the minimum payments on the other debts. The table below shows what Brandy’s payments would look like at the beginning and the order in which she would pay off her debt.

TYPE OF DEBTBALANCEINTEREST RATEMIN. PAYMENT + $25
Credit Card 2$1,953.33 15.99% 89+100 = $189
Student Loan$7,733.784.25%$79.02
Credit Card 1$9,607.9313.24%$178
Car Loan$12,000.005.61%$479
TOTALS$31,357.54825.02+100 = $925.02

Once Credit Card 2 is paid off, this is where the real magic begins. Instead of allowing the $189 monthly payment to be added to her spending money, Brandy will apply the $189 to the next smallest debt (the Student Loan, for a new payment of 79.02+189 = $268.02 ) and repeat the process until all of her debt is paid off.

You can begin to see why this method is called a snowball. Just like a snowball that is rolling down a hill becomes bigger and bigger as it accumulates more snow, the payment amount applied to each debt becomes bigger and bigger as each debt before it is paid off.

The entire time Brandy is paying off her debt, she continues to pay a total of $925.02 towards her debt payments. The only thing that changes is how that money is allocated.

By applying the debt snowball method, Brandy would be able to pay off her debt in 40 months and pay only $4,841.77 in interest!!

Wow! With the same $100, Brandy is now able to pay off her debt 6 years and 9 months faster and save $3,274.23 in interest payments compared to if she just paid the minimum payments.

3. Applying the Debt Avalanche Method

The debt avalanche method is very similar to the debt snowball method, but this time, Brandy will apply her extra $100 to her debt with the highest interest rate first. The table below shows the order in which her debt would be paid off and how the extra $100 would be applied.

TYPE OF DEBTBALANCEINTEREST RATEMIN. PAYMENT + $25
Credit Card 2$1,953.33 15.99% 89+100 = $189
Credit Card 1 $9,607.9313.24%$178
Car Loan$12,000.00 5.61%$479
Student Loan$7,733.784.25%$79.02
TOTALS$31,357.54825.02+100 = $925.02

In Brandy’s scenario, Credit Card 2 is still the first debt she will prioritize. This is because it is both the debt with the smallest balance and the debt with the highest interest rate. However, you can see how her other debts are prioritized differently based on which method is used.

Using the debt avalanche method, Brandy would be able to pay off her debt in 39 months and only pay $4,272.90 in interest! That is a total savings of 6 years and 10 months and $3,843.10 in interest compared to just paying the minimum payments.

In the same way an avalanche is more powerful than a snowball rolling down a hill, the debt avalanche method will always provide the greatest savings in time and money.

In Brandy’s case, the difference between the snowball and avalanche methods is pretty minor—just one month and less than $568.87 in interest. However, everyone’s debt situation is different, and the time and interest savings could be much more substantial.

Which Method is Right for You?

At this point, you may be wondering, “Why wouldn’t everyone choose the debt avalanche method if it provides the most savings?!” And that is a very valid question. Choosing between the debt snowball and debt avalanche methods depends on your financial goals and personality:

  • Debt Snowball: Ideal if you need quick motivation and psychological wins from paying off smaller debts quickly. Because you are paying the smallest balance off first, this means that you will most likely see your first debt paid off faster than if you focused on the interest rates. For many people, achieving a quick victory like this keeps them much more motivated to keep going than if they had to wait a longer time for their first debt to be paid off.
  • Debt Avalanche: Best if you want to minimize the amount of interest paid over time and can stay disciplined without frequent wins. If the idea of saving the most time and money overall is enough motivation in and of itself, then the debt avalanche method is a great option for you.

The most important takeaway is that you need to choose the strategies that will help you most to stay committed to your goals. Those decisions will not look the same for everyone.

What if I Don’t Have Any Extra Money to Apply to My Debt?

You are in luck. The beauty behind both the debt snowball and debt avalanche methods is that you do not actually need any extra money to still have these methods work for you! Yes, it may take a little longer and cost a little more in interest if you can only pay your minimum payments, but applying one of these strategies will still be significantly better than if you did nothing at all.

If you can only pay the minimum payments, then you will still order your debt based on the method you choose to use, and once the first debt is paid off, you will apply that minimum payment to the next debt on the list!

It is the exact same process. The only difference is that you will not add any extra money to that first debt’s minimum payment. But once that first debt is paid off, you will begin to see the snowball/avalanche take off.

Getting Started With Your Debt Payoff Plan

To get started on your debt payoff journey, you will want to follow a few simple steps.

  1. Make a List of All of Your Debt: Make sure to include what type of debt it is, the balance remaining, the interest rate, and the minimum payment.
  2. Calculate Your Extra Payment: Determine how much extra money, if any, you can apply to your debt payments each month.
  3. Choose Your Method: Decide if you want to pay off the smallest balance first (snowball) or the highest interest rate first (avalanche), and prioritize your debt in that order.
  4. Track Your Progress: Keep your list on your fridge or in your phone; anywhere that you can look at it regularly to stay motivated. Use a debt repayment calculator to visualize your savings and progress.

Final Thoughts

Hopefully, you have been inspired to begin your debt freedom journey! Which method do you like best? Feel free to comment below and let me know how your journey is going 🙂

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