All Financial Wisdom

Debt Payoff Strategies

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When you have debt and you finally decide that you want to pay it off, picking a debt payoff strategy can be a difficult decision.  You want to stay motivated, you want to get rid of the debt fast, and you want to pay the least amount as well.  Well there’s three popular ways meet your goals.  But first things first, pay all minimums on all debts.

Debt Snowball

The Debt Snowball method is the strategy that Dave Ramsey preaches through his publications.  After paying all minimums, list your debts from least amount owed to largest amount owed.  If there is a tie, use the debt that has the largest interest rate first.  Now using all of the extra money each month, pay off the first and work your way down to your largest one.  This method helps you see progress fast and reduces the amount of debt collectors that might bother you.  It definitely feels better only owing one person money compared to five.

Debt Avalanche

The Debt Avalanche method is the mathematically efficient method.  After paying all minimums, list your debts from highest interest rate to lowest interest rate.  Using all of your free cash, you pay off the largest interest rate, no matter if it is just a hundred dollars or if it is a couple thousand.  This method reduces the amount of money you will pay in interest over time.  The downside is you might not see much progress and still have several debt collectors contacting you.

Debt Blizzard

The Debt Blizzard method is the hybrid method and being popularized by Beverly Herzog in her book, The Debt Escape Plan: How to Free Yourself From Credit Card Balances, Boost Your Credit Score, and Live Debt-Free. After paying all minimums, list your debts from highest interest rate to lowest interest rate.  Just like the Debt Avalanche, you use all of your free cash to pay off the highest interest rate, but once you feel a little discouraged, you switch to your smallest debt to give you a momentum boost.  This method combines the financial benefit of the Debt Avalanche with the motivational progress of the Debt Snowball.

When decided which method to try, maybe consider this calculator, unbury.me.  It compares the Debt Avalanche method with the Debt Snowball method.

Good luck saving and paying down debt.  Let me know what method works for you.  Just don’t give up and keep chipping away.

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