Being in debt can feel like you're drowning. The constant payments that don’t feel like they’re going anywhere. The rising interest rates. All of this can feel like you are taking one step forward and two steps backwards with every payment that you take. As someone who has paid off over 50,000 dollars worth of both high interest and low interest date, I’ve found that paying off debt takes a methodological approach. Here are some of my favorite tips when it comes to developing a debt pay off plan that’s sustainable and doesn’t feel like your life is on hold.
I know I know, what does saving money have to do with paying off debt? A lot actually. A robust savings account is the best safe guard against getting further into debt. When emergencies arise, or unexpected expenses come up, having a reserve of cash on hand will allow you to take care of life’s little surprises without relying on predatory credit cards or pay day loans (yuck!).
Once you have at least one month of expenses saved up in a high yield savings account, you are ready to address the high-interest debt in your life.
When you have your savings in place, it's time to tackle your debt. Before you start paying off one thing or another, you need to make a comprehensive list of all the debt you have. Track down the details of every car loan, student loan, personal loan, credit card debt, etc that you are currently paying off.
You can’t begin to pay off your debt effectively without knowing exactly what kind of debt you are dealing with.
In this comprehensive list you will want to include the following data for each debt you owe on. Its important to note:
- The date the debt was taken out,
- The Average Percentage Rate (APR) of each debt
- The Minimum payment due each month
- The Starting value of the debt
- And if applicable the Closing dates of each debt pay cycle (this is really only applicable for credit card debts)
Collecting these data points can seem daunting but it is imperative that you hunt down this information in order to know your debt inside and out. It’s only then that you can appropriately formulate a plan to pay these debts off quickly and most effectively.
If you’re not very tech savvy, or if you want a handy template that you can take with you at all times, we have a downloadable Debt Tracker template that I have used to track my debt payoff process and keep myself motivated and on track. You can download a copy for yourself in our shop here: LINK
Once you have itemized every one of our debts and collected the APR data and minimum payment data you are ready to choose your debt pay off method!
There are two schools of thought when it comes to paying off debt. The snowball method and the avalanche method.
The snowball method is the pay off method where you continue to make minimum payments on all your debts but you choose your smallest value debt and attack it with any extra cash you may have in order to pay it off completely. Once that debt is paid off you’ll move on to paying extra payments towards your next smallest debt to get that one paid off faster. This sees you snowballing from smallest to largest debt, collecting small wins along the way in order to gain small wins along the way before tackling your largest debt.
The other debt payoff method is the avalanche method. This method sees you tackling your highest interest debt with extra payments first rather than your smallest debt while paying the minimum balance on all the other debts. By tackling the debt with the highest interest rate, you will end up paying less towards the debt over time since the higher interest rate debts are the debts costing you the most each month. This means you may be paying off a higher value debt for longer, but in the long run you will pay less towards the debt in general.
Why This Matters
When it comes to high-interest debt which depending on your age typically denotes any APR larger than 7%, a larger APR means you will be paying down a higher value off of the principle value. This typically means you will end up owing more money for a longer amount of time.
At the end of the day, all that matters is the method that will make the most sense for you and your life. The best method is the one that works for you, so don’t spend too much time analyzing which method to go with. All that matters is that you begin!
Having a debt payoff plan is a pivotal step towards financial security and taking your debt seriously.
This debt payoff plan has helped me pay off credit card debt, student loans, and medical debt without me wanting to pull my hair out. Personally I have done both the snowball method and the avalanche method based on where I was in my financial journey at the time. Both have helped me take my finances to the next level. I know you can do the same!
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