So, let’s say that you decide to pay off your debt; how should you go about it?
There are a few schools of thought on how to get out of debt quickly. Before you get started, though, you need to have some supplies:
- Current balance for every loan
- Interest rate for every loan
- Minimum payment for every loan
- Paper and pen
- Determination and persistence
All of the techniques I’m going to show you are variants of the debt snowball. The idea behind a debt snowball is that, as you pay off debt, the minimum payment of the paid off debt is added to the minimum payment of the next debt. As loans get paid off, the payments become larger and larger, like a cartoon snowball rolling down a hill. There are a few ways to order your loans for payoff, here’s a list of the most popular:
- The Highest Interest Rate First Method: List your debts from highest to lowest interest rate. Pay them off in that order. This is the method that results in the lowest interest expense. However, it may mean that a particularly large debt could be your first debt, which is pretty discouraging. Especially when you may have many smaller debts that could be gone in a month or two, but you have to slog through the big one first.
- The Lowest Balance First Method: This school of thought say list your debts out from lowest balance to largest balance, and tackle the little ones first. This method takes longer and costs more than the first method. So why would anyone do it? It’s very encouraging to free up quick minimum payments to add to your snowball. Also, the argument is, you’re paying things off so quickly that the difference in interest costs is insubstantial.
- Whatever You Want Method: Make a list however you want and pay off however you wish. It’s not so much a method as freestyle payoff. Usually it’s a combination of the above methods.
You’ll notice that all the methods are pretty simple when you get right down to it. So why aren’t more people debt free? It has to do with the last item on the list of supplies: determination and persistence. It takes time and dedication to get debt paid down, as well as reasonable good luck and a willingness to cut lifestyle to get debt gone.