There are three common debt repayment strategies that we look at to efficiently address your debt situation. The first step is to figure out how much debt you have (yes, I want you to total it up!) and how much it's costing you. In order to figure out how much its costing you, you need to list the interest rate and minimum payment associated with each debt. I usually exclude a mortgage when doing this, and focus on credit card debt, pay day loans, car loans, personal lines of credit, etc.
That's the starting point. Now the fun begins, in choosing which debt repayment strategy most aligns with your money mindset and your human behaviour.
1. Debt Avalanche
This strategy focuses on paying the minimum balances on all debt and focusing your attention and extra dollars on the debt with the highest interest rate first. This is the cheapest way to get rid of your debt, since you are paying off the highest costing debt first. The challenge with this strategy however, is that depending on the balance on that debt, it may take a really long time before you 'feel' success. If the debt with the highest interest rate also has the highest balance, it could be tough to stay motivated and stay on track when it feels like its taking forever to pay it off. Once you wipe out that debt, you apply that extra payment to the next highest interest debt and continue to avalanche your payments until all debt is gone.
2. Debt Snowball
This strategy focuses on paying the minimum balances on all debt and focusing your extra dollars on the debt with the smallest balance, regardless of interest rate. This may not be the cheapest route, but in my experience, its the one that aligns the best with most of our money mindsets and behaviour. Lets say you have a credit card with a $400 balance at 10.9% interest and one with a $15,000 balance and a 19.99% interest rate. By paying off the $400 card first, gives you a quick win and a feeling of accomplishment and pride. Then you take the extra payment that you would be normally putting towards the $400 card, and add it to the $15,000 card payment once the $400 card is paid off. That's the snowball effect. You continue rolling your payments, snowballing them, until all debt is gone.
3. Debt Snowflake
This strategy is usually used in conjunction with the first two and/or when you have a really tight budget and there isn't any extra dollars to go towards putting more than the minimum payment on your debt. When you come into money for any reason, that extra money goes onto your debt - using one of the strategies above to figure out which debt to apply it to. Sources of extra money could be a tax refund, selling an item at a garage sale or Facebook marketplace, overtime payments at work, etc. ANY extra money goes towards debt.
Many of my clients use strategies 2 & 3. I find it aligns with their human behaviour nicely, and tackles their debt appropriately.
There is one thing I know for sure, once you figure out your debt repayment strategy, and one that aligns perfectly with you, you can wipe out your debt in no time!
Yours in financial health,