2 Proven Strategies to Get out of Debt Fast
If you need to pay off your debt, read this post
“Our goals can only be reached through a vehicle of a plan, in which we must fervently believe and upon which we must vigorously act. There is no other route to success.”
— Pablo Picasso
If you are living in debt and need a strategy to pay it all off once and for all, then you need to carve out five minutes right now to read this post to the end.
This is the third and final part of a mini-series on debt within the larger Dollars & Decades series, where I tackle how to handle money at every stage of life.
Read to the end of this post for a detailed breakdown of the two most effective strategies to pay off debt. I will also give you a preview of a course I am creating on paying off debt, including a spreadsheet that will tell you exactly how much to pay on each of your loans every month.
Let’s go.
The Two proven strategies will help you pay off debt fast
The snowball method.
The avalanche method.
What is the snowball method?
The snowball method is a debt repayment strategy in which you focus on paying off your debt with the smallest outstanding balance.
It’s a four-step process.
Step 1: List your debts from smallest to largest.
Step 2: Make minimum payments on all your debts except the smallest.
Step 3: Pay as much as possible on your smallest debt.
Step 4: Repeat until each debt is paid in full.
Why people love the snowball method
The snowball method is the most popular debt repayment strategy because it leans into a simple truth about personal finance: habits and actions are more important than technical knowledge.
The psychology behind the snowball method is that paying your loan with the smallest balance first enables you to get your first loan paid off as quickly as possible. Once you pay off that first loan, you gain confidence and begin to believe that you can pay the rest of your debts. This provides you with energy and gets you excited to keep going.
I like the snowball method because it gives people hope. Many people believe that their current circumstances are “how it will always be.” Having an early win and seeing a loan completely paid off can change someone’s belief about what is possible for them to accomplish.
What is the avalanche method?
The avalanche method is a debt repayment strategy in which you focus on paying off the loan with the highest interest rate first.
Here are the four steps to paying off your debts using the avalanche method:
Step 1: List all your debts from the highest interest rate to the lowest interest rate.
Step 2: Make minimum payments on all your debts except the debt with the highest interest rate.
Step 3: Pay as much as possible on your debt with the highest interest rate.
Step 4: Repeat until each debt is paid in full.
While the snowball method is about psychology, the avalanche method is about efficiency.
Why the avalanche method is effective
If the psychological aspects of paying off debt aren’t a concern for you, and you don’t need to have that feeling of a quick win, the avalanche method might be a good fit for you.
The avalanche method will allow you to pay off your debt as quickly as possible while paying the least amount of interest.
Snowball vs. Avalanche methods: A detailed breakdown
I’ll use a hypothetical example to demonstrate precisely how to use the snowball or the avalanche method to pay off debt.
Let’s pretend you have the following debts.
Credit card 1: $20,000 balance at a 22% interest rate.
Credit card 2: $6,200 balance at a 16% interest rate.
Credit card 3: $7,600 balance at a 17% interest rate.
Student loan: $44,000 and 8% interest rate
Line of credit: $3,500 balance and 7% interest rate
Total debt: $81,300
Your goal: Pay off all debts in six years.