How to pick the best debt payoff strategy

Once you decide it’s time to get out of debt, you need to pick a debt payoff strategy. Read all about the top four ways to pay off debt and find the best method for you.

Congratulations!

You have decided to start paying off debt! That’s the first step.

Now what?

It is time to pick a debt payoff strategy.

Here we will talk about the four most popular ways people successfully pay off debt to help you decide which method to choose.

The most popular methods include

The debt avalanche
The debt snowball
Largest payment
Mixture

Let’s talk about each option and why it might be a good fit for you.

The debt snowball

Starting with one of the most popular, let’s dive into the debt snowball.

If you are familiar with Dave Ramsey or other financial figures, this method may ring a bell.

It is widely popular and the exact method my husband and I used to get ourselves out of over $50,000 worth of debt.

So how do you know if this is the best strategy for you?

how to pick the best debt payoff strategy

Do you thrive off reward or get frustrated when things take a long time? Is sticking to goals something you struggle with? Are you someone who enjoys physicological satisfaction? Is it difficult for you to practice patience or, do you work well with smaller digestible projects?

If this is you, the debt snowball will be perfect!

The debt snowball means you pay off your debts from smallest to largest.

The goal of the debt snowball is to pay off the smallest debt amount first.

Once you build momentum, you can then work on larger debts.

Because this strategy breaks your debt down into small bite-sized pieces, it works well for those who need constant motivation. It’s also ideal for those who get overwhelmed easily or people who like the feeling of reward.

The debt avalanche

Another popular choice is the debt avalanche.

This method is widely favored becuase it is the strategy that makes the most sense.

A strategy like this may work for you if you are a numbers person. If you enjoy planning, or math I would recommend this method.

Are you a person that problem solves or likes to find the most efficient way to do things? Do you enjoy saving the most money possible? Are you someone who pays attention to detail and doesn’t give up easily?

The debt avalanche works well for people who are no fluff, factual, and like a good challenge.

Choosing to use the debt avalanche means you would save yourself money on accruing interest.

When using the debt avalanche you order your debts from highest interest rate to lowest.

Paying off your debt based on interest means you will save yourself the most money.

The risk is that these loans may be large and take much longer to pay off.

Largest payment

Paying off loans by payment amount is not as popular as you may think.

Even though this debt payoff strategy isn’t recommended often, it still might be the right method for you.

difference between debt payoff strategies

If you are someone with little money left over at the end of each month, you may consider trying this strategy. Do you have larger payments? Is your income being eaten up by specific loans? Are you worried about having little wiggle room in your budget?

Paying off the loan that costs you the most money every month can free up a lot of your income.

The largest payment strategy means you pay off the loan that is costing you the most every month.

Whether that is a credit card, car loan, student loan, or even personal debt, using this method means you pay that debt off first.

Paying off a debt that is costing you $400-$700 per month allows that money to go directly back into your budget.

Imagine how much progress you could make on other debts if you had all that extra cash!

This strategy disregards both interest rate and loan amount. The goal is to pay off the loan that is eating away at your income.

Mixture

Sometimes one method doesn’t fit all.

It is possible to use a mixture of these strategies to pay off debt.

For example, if you have one debt that has an extremely high-interest rate, let’s say 25%, you may choose to pay that off first. Even if it isn’t your highest monthly payment or smallest loan amount.

Then after that is paid you may consider paying off the next smallest loan to eliminate the payment and snowball those payments into your largest loan which could be your car.

I don’t see it often that people mix different types of payoff strategies but, it possible and those who do it are successful.

A mixture of the above methods may work for you. If you are an organized and focused person, you may be able to jump from one method to another. Mixing is great for those who are laser-focused.

How to figure out the best payoff strategy for you

If you still aren’t sure about which method to choose try this exercise.

Write down all of your debts with the exact amount you owe.

Then right down the interest rate and how much your monthly payment is.

Writing everything down will allow you to see your debts in a more organized manner. What loan is costing you the most each month? Do you have any that are close to being paid off? Are there any that are costing you hundreds of dollars in interest?

Once you have everything in front of you, there may be a clear strategy or at least one debt you can start tackling first.

What type of debt is best to pay off first?

If you were trying to be as strategic as possible, you would pay off the debt costing you the most money.

Most of the time this is a high-interest rate credit card.

Even if this isn’t your smallest or largest debt, it most likely has a high-interest rate attached.

Today, the average interest rate on a credit card is 16.13%, and if you have bad credit, that number can skyrocket.

These are the types of debts you should pay off first.

Once you have that done, you can reevaluate the rest.

I would then move to any loans that have less than $3,000 left.

Anything that you only owe a few thousand dollars on will be quick to complete. Getting those types of debts off your plate will free up those payments and lessen your overall debt amount.

Then choose which debt payoff method you want to continue.

Why we chose the debt snowball

My husband and I chose the debt snowball method for a couple of different reasons.

One, all we had were student loans and car payments. Our car payments were manageable and weren’t eating up a ton of our income and, the interest rates on them were very low.

We didn’t have any credit cards or debts with high-interest rates other than the loan we took out for our wedding. Once the wedding was over, we used all the money we made to pay it back.

Secondly, both Mike and I had consolidated our student loans and were able to make individual payments. Most of them were in the $2,000-$3,000 range. All of which had reasonable and comparable interest rates.

Even though we had over $50,000 worth of debt, everything could be divided into smaller manageable chunks. We also didn’t have any loans with high-interest rates.

Using the debt snowball meant we could pay off our smaller loans first and then use that money to pay off the larger loan. Once we gained some momentum, we were paying off loans within just a month or two.

It took us nine months to pay off $28,375.

The order you pay off your debt is the order that makes you successful.

The worst thing you can do for progress is pay a little towards each.

Always pay your minimum balance and pick one loan to work on at a time.

I don’t like to tell my clients to focus on the 50 pounds they have to lose or the 40 more pounds they need to lift. Just focus on the first five.

And no method is the perfect one if you are not reaching your goals. If you choose to start with the debt avalanche and find yourself frustrated and ready to quit, reassess.

There comes a time when we need to stop thinking about the most logical way to do things and just start taking action.

Paying even $20 more than a minimum payment can take years off a loan.