How to Choose A Debt Payoff Strategy

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Kumiko Ehrmantraut

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Kumiko Ehrmantraut

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• What Are Target Date Funds & Are They a Good Investment? - August 5, 2020

Are you tired of feeling stressed and trapped by debt? Trust me. I’ve been there. I completely understand how you feel. 

Thankfully, I found a way out of my debt mess. Below I’ll share a few strategies that helped me plus some tips on how to create a debt payoff plan that will work for you. 

Why You Need a Plan

A debt payoff plan is about more than simply wiping out debt. It’s about making the right decisions with your money, so you don’t go into debt any further. 

The right debt payoff plan will help you manage your finances in a way that sets you up for future financial success. It’s the key you need to help you break the debt cycle once and for all. 

In my life, more than once, I repeated the following pattern. 

• I paid off my credit cards. 
• I celebrated the accomplishment. 
• And then I turned around and racked up more credit card debt again. 

I never found a system that set me up financially so that I didn’t have to use my credit cards again. So, I finally created a method of my own. I now use my Budget by Paycheck method to never again feel the pressure to use my credit cards the way I did before. 

• Read: My Debt Story – Accomplishing the Unimaginable

Getting Started

If you want to take your debt payoff journey to the finish line, you also need to create a plan of attack. It’s essential to outline, step by step, the system you’ll use to get out of debt in the fastest, smartest way possible. 

There are two popular debt pay down methods to choose from when you’re ready — the snowball method and the avalanche method. 

With either option, it’s important to make at least the minimum monthly payment on all of your debts. From there, you can funnel any extra money you have toward aggressively paying down one debt at a time.

Here’s how each strategy works.  

The Snowball Method

When you use the snowball method, you focus on debts with the smallest balances first. This type of get-out-of-debt plan works great for people who are motivated by quick results like wiping out an entire debt. If you tweak the approach to pay off your smallest credit card balances first, the snowball approach might improve your credit rating too. 

The Avalanche Method

With the avalanche method, you opt to target debts with the highest interest rates first. This approach can be a smart choice for two reasons. It could save you the most money in interest fees and possibly help you to get out of debt faster. 

• Read: Pay off Debt With the Debt Snowball Method
• Read: How to Pay Down Debt Using the Avalanche Method

Which Approach Is Best? 

Picking the right debt elimination strategy to follow is a highly personal choice. If you’re planning to purchase a home or perhaps refinance debt to speed up your debt-free journey, the snowball method might be a good fit. Remember, the snowball method has the potential to impact your credit scores more quickly since you’re paying off individual debts faster. (This usually applies if the debts you’re paying off first are revolving credit cards.)

If you don’t plan to apply for a new loan or credit card anytime soon, you might prefer the avalanche method. Although the potential for credit score improvement might be slower with this approach, there’s no doubt the avalanche method can save you money. 

Personally, I started with the snowball method first. I wanted to see progress early. But after I got rid of some smaller credit card balances, I began to pay attention to the amount of interest I was paying on my remaining debts. 

To be honest, seeing the size of my interest payments (especially on higher-interest debts) versus the money actually applied to my principal loan amounts made me furious. So, I made a switch.

I’m a numbers person. The avalanche method ultimately made more sense to me. Saving money on interest payments and getting out of debt quicker became my priorities. 

Tracking Your Progress

Just like you have to track your spending if you want to reach your financial goals, it’s also essential to track your progress as you pay down debts. Luckily, there’s a free online tool that can make monitoring your debt elimination progress easy — the Debt Reduction Calculator by Vertex42.

The Vertex42 calculator is a free download available in the following formats: Excel, OpenOffice, and Google Sheets. Once you download the spreadsheet to your device, you’ll need to complete the following steps:

• Change the date, so it reflects the start date of your debt paydown journey. 
• Enter the following information about each of your debts:
  • Creditor’s Name
  • Balance Owed
  • Monthly Payment Amount
  • Interest Rate

(Getting your debt written down, in front of your face can be overwhelming. But remember, this is the first step toward the financial freedom you crave.)

• Find the total amount you owe each month (listed on the spreadsheet) for your minimum payments. 
• Look at your budget and figure out how much extra money (above minimum payments) you have available to put toward paying down debt. 
• Compare debt elimination strategies on the spreadsheet. The calculator will show you how much interest you’ll pay with each approach (snowball, avalanche, etc.) and how long it will take you to become debt-free depending upon your chosen plan.
• Finally, select the strategy you want to use to pay off your debt. If you choose the snowball or the avalanche approach, the calculator will direct you to apply any extra money each month toward either the debt with the lowest balance or the debt with the highest interest rate. 

Confused? For a full video tutorial on how to get the most out of the Vertex42 Debt Reduction Calculator, you can watch my step-by-step guide and review. 

• Read: How to Create a Plan to Pay Off Debt

There’s Only One Wrong Choice

Whatever motivates you most — seeing progress quickly, possibly boosting credit scores, or saving money on interest — should help determine whether the snowball method or the avalanche method will be the best fit. You can even start with one option and switch to another later, like me. If tackling this on your own is a bit much, you can check out Debt.com for their help with credit card debt.

The only wrong choice you can make is staying stuck. 

I know that taking the first step to start of debt payoff plan can be scary, especially if you’ve tried and failed before. But I can also tell you that life on the other side of debt is totally worth taking that big, scary leap.