Do you ever wonder what the best way to get out of debt is? With so many opinions floating around, it’s easy to feel overwhelmed. But fear not! Today, we’re breaking down the three most popular ways to get out of debt and helping you decide which one fits your budget best. Let’s dive in!

---

Understanding the Problem: Debt Overwhelm

The problem is, whether you have a lot of debt or just enough to stress over, knowing where to start can be daunting. It’s easy to feel paralyzed by analysis. You hear so many ways to tackle debt, and it can be confusing to decide which one to use.

---

Method 1: The Debt Snowball Method

Our dear friend and budget bestie, Dave, made this one famous. Here’s the gist:

• Focus: Tackle the debt with the smallest total balance first.
• Goal: Quick wins to stay motivated.
• Order: Pay off debts from smallest to largest balance, regardless of interest rates or minimum payments.

Example:
If you have:

• Credit card with a $500 balance
• Another card with a $1,000 balance
• One more with a $5,000 balance

You start with the $500 debt, then the $1,000, and finally the $5,000.

Why it Works:
The psychological boost from paying off a debt completely can be huge. It builds momentum and keeps you motivated to tackle the next debt. One of our clients recently shared how emotional she felt paying down her smallest debt—it made her feel in control and proud of her progress.

---

Method 2: The Debt Avalanche Method

Popularized by Suze Orman, this method is for number lovers:

• Focus: Pay off the debt with the highest interest rate first.
• Goal: Save the most on interest.
• Order: Tackle debts based on highest to lowest interest rate, ignoring total balance size.

Example:
If you have:

• Debt at 25% interest
• Another at 15% interest
• One more at 5% interest

You pay off the 25% interest debt first, then the 15%, and finally the 5%.

Why it Works:
By focusing on the highest interest rate, you save the most money in the long run. This method is ideal for those motivated by the numbers and looking to minimize the total amount paid over time. It’s also ideal for when/if you have a lot of money to throw at debt.

---

Method 3: The Minimum Payments Method

Focus on the debts with the highest minimum payments:

• Focus: Eliminate debts with the highest minimum payments.
• Goal: Free up the most money in your budget each month.
• Order: Pay off debts with the highest minimum payments first.

Example:
If you have:

• Debt with a $500 minimum payment
• Another with a $250 minimum payment
• One more with a $100 minimum payment

You pay off the $500 minimum payment debt first, then the $250, and finally the $100.

Why it Works:
This method is great for freeing up cash flow quickly. By eliminating the highest minimum payments first, you can significantly reduce your monthly expenses, giving you more money to allocate towards other debts or financial goals.

---

Creating Your Debt List

Step 1: List out all your debts from smallest to largest balance. Include:

• Name of the debt
• Type (credit card, vehicle loan, etc.)
• Starting balance
• Current balance
• Interest rate
• Minimum payment
• Due date

---

Step 2: Analyze Your Debts

Now that you have your list, it’s time to analyze it for any special circumstances. Here’s what you need to look for:

• 1. 0% Interest Promotions:
  • Identify: Check if any of your debts are currently at 0% interest but will jump to a higher rate after a certain period.
  • Action: If you can realistically pay off this debt before the rate increases, prioritize it. However, if the balance is too high to pay off in time, focus on other methods.
  • Example: You have a credit card with a $2,000 balance at 0% interest for six more months. If you can pay it off within six months, prioritize it to avoid high interest charges later. If you can’t, consider focusing on other debts.
• 2. High Minimum Payments:
  • Identify: Look for debts with high minimum payments that significantly impact your monthly budget.
  • Action: Consider paying these off first to free up cash flow, allowing you to allocate more money to other debts.
  • Example: A furniture loan with a $1,200 balance and a $500 monthly payment. Paying this off quickly would free up $500 each month, which can be redirected to other debts.
• 3. Close Balances with Varying Interest Rates:
  • Identify: Find debts with similar balances but different interest rates.
  • Action: Prioritize paying off the one with the higher interest rate to save more money over time.
  • Example: Debt A: $4,000 balance at 25% interest. Debt B: $3,800 balance at 15% interest. Paying off Debt A first will save more on interest even though the balance is slightly higher.
• 4. Lump Sum Payments:
  • Identify: Consider any lump sums you might receive (tax refunds, bonuses, etc.) and how they can best be used.
  • Action: Use lump sums strategically to pay off debts that will provide the most benefit, such as high-interest debts or multiple smaller debts.
  • Example: You receive a $5,000 tax refund. Use it to pay off a high-interest debt or multiple smaller debts to maximize your financial benefit.
• 5. Special Circumstances:
  • Identify: Look for any debts with special terms or conditions that might affect your strategy (e.g., deferred interest loans, penalty rates, etc.).
  • Action: Adjust your repayment plan to account for these special terms to avoid unexpected costs.
  • Example: A deferred interest loan where interest is only applied if the debt isn’t paid off in full by a certain date. Prioritize paying this debt off before the interest applies to avoid a large lump sum interest charge.

---

Personalizing Your Debt Plan

Every budget is unique, and so should be your debt repayment plan. Use the methods and examples above to create a strategy that works for your specific situation.

Client Insight:
We had a client with a mix of small and large debts. Initially, we used the snowball method for quick wins. As we progressed, we noticed some high-interest debts with similar balances to the ones being paid off. We switched gears to tackle those high-interest ones next, saving her a significant amount in interest over time. Then we went back to the debt snowball.

Another client stuck to the debt snowball except when she got a tax return. She paid off a debt far down the list and were so happy to see it go! Then, she went back to the snowball. Later, she got a bonus and paid off her car, give her $400 back in her month budget that she could then put toward debt! Then she went back to the snowball.

---

Your Action Plan

1. List your debts: Get all your debts on one piece of paper with relevant details.
2. Analyze special circumstances: Identify any debts that need special attention.
3. Choose your method: Decide which repayment method fits your situation best.
4. Stick to your plan: Follow through consistently and adjust as needed.

We hope this guide helps you tackle your debt effectively. Remember, it’s all about finding what works best for your unique financial situation. If you have any questions or success stories, we’d love to hear from you!

Remember, you’re a unique, awesome unicorn 🦄 , and your situation is different. Make your plan, stick to it, and watch your debt disappear! 🌟

Book Your Free Call Now!

We are excited to create the time & space to talk to you about your current money situation. This is a free, no-obligation call where we can answer questions you may have and maybe find some quick wins for your budget.

What do you have to lose?