How to pay off Debt Faster
Every person at some point in life is going to acquire debts. There are positive debts, such as buying a house, and there are negative debts, such as getting a credit card.
If you have debts, you are not alone. Statistically, people living in the United States have debts of $100,000 on average.
This leads people to acquire more negative debts in short periods and end up having large debts that they do not know how to pay. It is different when one owes a relative or friend and can pay them without interest, compared to when the debt is with a bank and due to late or minimum payments one ends up paying high interest.
Today we are going to focus on paying off debts as quickly as possible in 3 ways. When done strategically and focusing on fitting into a budget, it allows for achievable and sustainable short- and long-term goals.
For this, you will need to sit down with a paper and write down all your debts. Is it fun? Not at all… this is where you see who you owe your soul to. But it’s better to have an exact idea of who you owe and how much the amount is. It’s also important to understand which kind of debts are more important to pay off first than others.
What information do you need to have?
- Debt/account name
- Type of debt you have (student, Mortgage, Credit card)
- Total balance
- Interest rate (some are higher than others)
- Payment terms/duration
- Minimum monthly payment
Once you have all this information, then it is necessary to evaluate which type of PAYMENT METHOD is best for you.
50/30/20
Do you know how much you can afford to pay each month? What are your expenses and monthly costs? What are your incomes? How much are you currently paying towards your debts?
A strategy that helps to figure out how much you will pay towards your debts is the 50/30/20 rule.
Basically, 50% of your income goes towards your NEEDS. Things that are essential to live such as your housing, food, health insurance, etc.
30% goes towards your WANTS or desires, and 20% goes towards savings, which in this case, you can allocate it towards your debts. If you want to be debt-free, you can take a percentage from the 30% and add it to your monthly debt payments.
This means that at the end of the day, you will know exactly how much you will be paying monthly towards your debts and calculate how long it will take to pay them all off depending on the total balance and the payment method.
Which is the best for you?
It all depends on your circumstances, your income, and your balances. That is to say, each person is different and you will have to figure out which of these methods will be best for you, but let’s move on to see the following 3 methods.
Snow Ball Method
This method is the most universally used. It involves aggressively paying off small debts first while paying the minimum on other debts and subsequently moving on to paying off the larger ones. The important thing is to achieve those small victories or trophies of paying off each debt one by one. Now, if these debts are credit card debts, obviously once we’re paying off a card, we don’t use it anymore, nor do we use any other credit card.
This also applies to the other two methods.
In the snowball method, the priority is to pay off the smallest or minimum debts first.
Example: Total debt $19,200
Snowball method
- $200 Credit Card
- $500 Treatment for Dentist
- $1,000 Debt with a friend
- $2,500 Car Debt
- $15,000 Student Loan
In this, we are not taking into account what needs to be paid for interest… but what is lowest in debt. This way, we are paying off the pending debts one by one.
It is important to emphasize that this method is aggressive because we are tackling the smaller debts first, and it is expected that they can be paid off as soon as possible.
Now, there is another payment method where we can pay it in a different way or method.
Avalanche Method
The avalanche method prioritizes paying off the debt with the largest or highest interest rate as quickly as possible, regardless of the total balance. When one adds up what is owed PLUS THE INTEREST, they can see the difference it makes in the final amount paid off. Accounts with high interest rates (10% to 30%) need to be paid off immediately, while the rest can be paid with minimum payments. Returning to the previous example.
Example: Original Debt
- $200 Credit Card with 15% interest
- $500 Dentist for a treatment 2% interest
- $1,000 A loan to a friend. 0% Interest
- $2,500 The remaining debt on a car. 22% interest
- $15,000 Student Loan 8% interest
Paying off Avalanche Method
- $2,500 The remaining debt on a car. 22% interest
- $200 Credit Card with 15% interest
- $15,000 Student Loan 8% interest
- $500 Dentist for a treatment 2% interest
- $1,000 A loan to a friend. 0% Interest
If you notice, the way to pay off the debt would be different, since we do not focus on paying off small or large debts, but rather those with the highest interest.
A $1,000 debt with 10% interest over 12 months ends up being $2,200. ($1,200 in interest)
That’s why it’s so important that when applying for a credit card or taking out a loan, people understand what long-term interest means.
This method also requires aggressively paying off debts one by one.
And finally, there is the other method of payment.
Consolidation Method
This method is implemented for people who have massive debts with multiple interests and it is more convenient to consolidate. This means putting all the debts in one place, with one bank, and paying only one interest rate.
Example:
- Debt 1 $10,000 Interest 5%
- Debt 2 $25,000 interest 26%
- Debt 3 $48,000 interest 13%
- Debt Consolidation
Total Debt in ONE payment account $83,000 with an interest of 3.5%
That means putting all the debts together in a single bank with a single fixed interest.
Any method you choose will be worth it because you will be paying off your debts strategically and consistently. Enjoy your achievements and don’t forget that once your debts are paid off, it will be time to start saving.
