When I first got serious about getting out of debt, I used the traditional “shotgun method” and just threw as much as I could into every one of my debts. But I was quickly overwhelmed by how much debt I had in front of me, and I didn’t think I could ever get debt free. My problem was that I didn’t have a plan.
The best way to accomplish your goals is to lay out a clear roadmap, break it up into manageable steps, and then focus on each step one-at-a-time. My three favorite methods for getting out of debt use a similar concept: focusing on one particular debt while paying minimum payments on the rest.
To get moving on the road to debt freedom, you need to to know the total of all your minimum debt payments, and how much you can afford to pay on all of your debts (see Plan Spending Every Month if you don’t already have a spending plan).
- Snowball Method. In the book, Total Money Makeover, Dave Ramsey teaches the “debt snowball” as the second step towards achieving financial peace. To use the debt snowball, list all of your debts in order of smallest to largest. Then, schedule minimum payments on all of your debts. Apply everything extra you can afford to pay to the smallest debt. Once you’ve paid that debt off, “snowball” everything you were paying on the first debt into the second debt. As you build towards the larger debts, you will have more cash to apply to them.With the debt snowball, you will be able to get the first debt paid off the quickest. Ramsey believes this method works best because it gives the psychological reinforcement early and lets you build momentum as you get to the larger debts. If you feel overwhelmed by your debt and need some inspiration and motivation, the snowball method is probably the best for you.
- Highest Interest. I used the debt snowball method when I first got serious about getting out of debt, but I just couldn’t take seeing the interest each month on my higher interest debt. Eventually, I decided to shift my focus to the highest interest debt. To use the highest interest method, list all of your debts in order of largest interest rate to smallest. Then, focus on paying off the highest interest debt first and then snowball payments into the smaller interest rate debts as you pay each one off.The highest interest method could work if you’re more analytical than emotional. This method will save you the most money on interest payments, but may require some extra discipline to stick with it if the highest interest rate debts are also the largest.
- Best for Last. The largest debts are also the hardest, so why not get them out of the way first? The best for last method is the reverse of the debt snowball. List all of your debts largest to smallest and focus everything you can on the largest debt, and then snowball everything into the smaller debts as you pay each one off. If you are extremely disciplined, this could be the best option.Paying higher interest debts first seems very logical, but getting the burden of the largest debts off your shoulders as quick as possible is the best thing you can do for your mindset.
What is keeping you from getting out of debt?