How to get out of debt (3 methods)
If you’re in debt and feeling overwhelmed at how to even start to dig your way out - I’ve been there.
I remember junior year of college, being at the mall with my family, and shopping for Christmas presents. I had run up thousands of dollars on multiple credit cards over the last several months and felt the weight of the stress pulling me down. I didn’t know how to tell them that I couldn’t afford even a few Christmas presents that year.
I felt like I couldn’t breathe.
Worst of all, I had been there before - bailed out by my older brother for $1,700 the Christmas before.
I was embarrassed and ashamed. I didn’t want to tell my family I was in debt… again.
I’ve come a long way since then. I now have only $3,000 in 0% interest credit card debt for buying appliances for my rental property and two mortgages (one being the rental property and the other a primary residence). I pay more than the minimum on the $3,000 and all my other bills are paid in-full each month. My credit score is an 800!
The relief of seeing credit cards at a $0 balance each month is what I want for you. That freedom of knowing that if the world came crashing down and you lost your job tomorrow, you only have to worry about a roof over your head and food, instead of all that PLUS minimum payments from debt piling up with interest.
There are THREE methods that are popular for debt repayment: debt snowball, debt avalanche, and debt tsunami. I’ll go over all three individually and then compare them so that you can choose which one is right for YOU!
Debt avalanche
Debt avalanche is the method that makes the most mathematical sense for paying off debt. The goal is to target the debt with the highest interest first, working your way down to the lowest interest debt. Using this method, you’ll get out of debt faster and pay less in interest over time.
The strategy
Make a list of all your debts. Note the minimum payments and the interest rate
Pay the minimum balance on each debt every month
For the debt with the highest interest rate, pay as much as you can ABOVE the minimum
Repeat until the debt with the highest interest rate is gone
Now, looking at the list of remaining debts, repeat 1-4
Since the last highest interest rate debt is paid off, you should have more money left (at least the minimum payment on the previous debt) to pay towards the next debt
Pros
Makes the most mathematical sense
Pay less in interest over time
Get out of debt faster (because less debt is being added each month in the form of interest charges)
Cons
Takes slightly more work to check interest on each debt, especially if these numbers change month-to-month
Can take longer to see results if debt with highest interest is also the highest balance
Example
List of debts:
Chase Visa:
Balance: $1,300
Interest: 24%
Minimum payment: $39/month
Amazon Visa:
Balance: $236
Interest: 14%
Minimum payment: $25/month
Using the debt avalanche method, you would start with the debt that charges the most in interest, which in this case is the Chase Visa at 24% interest.
You would pay the $25/month minimum payment on the Amazon Visa and then put all your extra money towards the Chase Visa, paying as much as you possibly can above the $39/month minimum.
Once you have finished paying off the Chase Visa, you would take the $39/month minimum payment from that old debt plus whatever extra money you had each month and throw it at the Amazon Visa balance.
2. Debt snowball
Debt snowball is the method that provides the most psychological benefits for paying off debt and these benefits actually make you more likely to succeed, according to the Harvard Business Review, in paying off ALL your debt. The goal is to target the lowest balance debt first, getting quick wins at the start of your debt-free journey to build momentum for later when you start to tackle the big debts.
The strategy
Make a list of all your debts, ordered from lowest balance to highest balance. Note the minimum payments
Pay the minimum balance on each debt every month
For the debt with the lowest balance, pay as much as you can ABOVE the minimum
Repeat until the debt with the lowest balance is gone
Now, looking at the list of remaining debts, repeat 1-4
Since the last lowest balance debt is paid off, you should have more money left (at least the minimum payment on the previous debt) to pay towards the next debt
Pros
Emotionally rewarding to see list of debts shrinking quickly
Easier to focus on large debts once the smaller ones are paid off/less to keep track of if the list of debts is smaller
Higher chance of sticking with it and successfully paying off ALL your debt
Cons
Since we’re ignoring the interest rate with this method, you…
Might pay more interest over time
Might take longer to get out of debt
Example
List of debts:
Chase Visa:
Balance: $1,300
Interest: 24%
Minimum payment: $39/month
Amazon Visa:
Balance: $236
Interest: 14%
Minimum payment: $25/month
Using the debt snowball method, you would start with the debt that has the lowest balance, which in this case is the Amazon Visa at a $236 balance.
You would pay the $39/month minimum payment on the Chase Visa and then put all your extra money towards the Amazon Visa, paying as much as you possibly can above the $25/month minimum. Since the debt is small, it should be paid off very fast.
Once you have finished paying off the Amazon Visa, you would take the $25/month minimum payment from that old debt plus whatever extra money you had each month and throw it at the Chase Visa balance.
3. Debt tsunami
The debt tsunami method is the most emotionally beneficial one of them all. The goal is to target the debts that are weighing you down the most and causing you the most stress - in other words, the debts with the “highest emotional impact” go first.
The strategy
Make a list of all your debts, ordered from most stressful to least stressful. Note the minimum payments
Pay the minimum balance on each debt every month
For the debt that impacts you the most emotionally, pay as much as you can ABOVE the minimum
Repeat until the debt with the most emotional impact is gone
Now, looking at the list of remaining debts, repeat 1-4
Since the debt with the most emotional impact is paid off, you should have more money left (at least the minimum payment on the previous debt) to pay towards the next debt
Pros
Emotional relief of getting rid of extremely stressful debt
Healed relationships with family and/or friends if the most stressful debts were borrowed from them
Cons
With most stressful debts gone, you might lost interest in paying off your remaining debts
Since we’re ignoring the interest rates with this method, you…
Might pay more interest over time
Might take longer to get out of debt
Example
List of debts:
Chase Visa:
Balance: $1,300
Interest: 24%
Minimum payment: $39/month
Amazon Visa:
Balance: $236
Interest: 14%
Minimum payment: $25/month
Loan from sister:
Balance: $365
Interest: 0%
Minimum payment: No official amount per month
Using the debt tsunami method, you would start with the debt that is most emotionally impactful.
While it might make sense financially to pay the debts that actually charge interest first, if the loan from your sister is causing issues in your relationship, the debt tsunami method says to pay your sister first. With this method, we want to do what makes the most emotional sense.
You would pay the $39/month minimum payment on the Chase Visa and the $25/month minimum payment on the Amazon Visa to avoid incurring any extra fees for non-payment or hurting your credit score. With the minimum payments made, you would then put all your extra money towards the loan from your sister.
Once you have finished paying off the loan from your sister, you can either pick the credit card balance that is impacting you the most emotionally to pay off next (sticking with the debt tsunami method) or choose another method (debt snowball or avalanche) from the above list to finish off your debt repayment journey.
Which is better?
The truth is - it depends on your goals.
If you’re extremely disciplined and want to save as much money as possible - go with the debt avalanche method.
If you’re overwhelmed by the number of different debts that you have, looking for the best odds to sticking with paying off your debts, and need the emotional wins to keep you going, choose the debt snowball method.
If you’re struggling with the emotional weight of certain debts and they’re impacting your personal life or relationships with others, use the debt tsunami method.
And don’t forget…
Just because you START with one method, doesn’t mean that you need to stick with that method until ALL your debts are paid. You can always mix and match methods! For example…
If you want to do what makes the most mathematical sense and pay the debt with the highest interest rate (debt avalanche) BUT you borrowed money from a friend with no interest and it’s hurting your relationship: pay the debt to your friend first (debt tsunami) and then switch to the debt avalanche method after.
Personal finance is just that - personal. It’s not ALWAYS just about the numbers and what makes financial sense. What benefits your emotional state is extremely important in terms of getting (and staying) out of debt.
Staying out of debt
We’ve gone over the three most popular methods for paying off debt - one that gives the best financial result, another that is more emotionally rewarding and more likely to lead to success, and another that can truly heal your relationships and calm your anxiety.
The thing is - none of these methods will fix the underlying problem that got you into debt in the first place. This article will help you get out of debt. But to stay out of debt requires truly changing your mindset on spending and saving money. The fact that you’re here, reading this post, means that you’re on the right track.
Don’t stop here, though! Get passionate about your finances, your freedom, and the life you truly want to live. Subscribe to this blog, other blogs, watch videos on YouTube about finances - you’ll find that there’s a whole community out there of people like you who want to be debt-free and successful, too.
If I could do it as a scared college student, I know that you can do it, too!