Ways to Quickly Paydown Debt

There are many differing opinions when it comes to paying down debt.

Should you prioritize paying off those debts with the highest rates? Or should you eliminate the debts with the lowest balance first to free up cash flow?

As with most binary options in life the answer is “it depends”.

Debt Paydown Methods

There are two schools of thought when it comes down to paying off debt.

• Payoff debt with highest interest rates first (avalanche method)
• Payoff debt with lowest balances first (snowball method)

Case Study

Look at the picture below. Do you notice anything interesting about it?

What is interesting is that in each scenario you are paying off the same exact debts.

What is different is the order in which you are paying down debts.

Let’s discuss the pros and cons of each method now.

Do Nothing Approach

If you do absolutely nothing other than make your minimum monthly payment you will pay $1,550 every month.

You will pay off all of the debts in roughly 5.5 years. You will also pay nearly $12,000 dollars in interest!

In other words, it will cost you a little over $2000 each year in interest.

This assumes that once a loan is paid off you use the excess money to pay off the highest interest rate debt next.

But You Have a Little Extra Money to Use

Now let’s assume for the sake of this case study that you have an extra $250 each month you can throw at this debt.

Which option do you think will pay off all your debts first? And which option will decrease the amount of interest you pay?

Avalanche Method

The avalanche method is simple. Take your debts and list them out from highest interest rate to lowest interest rate.

That is the order you then pay down your debts.

If you take the extra $250 a month and utilize the avalanche method, you will pay off all of these debts in a little less than 4 years.

You also save nearly $3500 in interest! What could you do with an extra $3500?

Snowball Method

The snowball method is a little bit different.

It rearranges your debts by balance. Start with the smallest and list them out with the biggest at the end. This is the order that you pay down the debt.

This method was popularized by Dave Ramsey.

This is not my preferred method, but it is better than not paying down debt at all.

In the case study above, following the snowball method, you would pay off the debts in exactly 4 years. You would also save $2200 in interest.

So not quite as much money saved as the Avalanche Method but still some serious savings!

What I Tell My Clients

Looking at the numbers, you get the most bang for your buck following the Avalanche Method.

But that does not necessarily mean that it is the best for your situation.

If you are a client who has cash flow issues, I would tell you to knock out some of the smaller debts first to provide you with more cash flow.

If you are looking for the best return, then you should pay off the highest rate debt first. Another caveat is if you have debts below 4% interest. I often advise clients that if their debts are at or below 4% it may make sense to not accelerate the payoff.

One tool you can use to help you pay off your debt is unbury.me.

Follow that link and you can plug in all your debts, say how mow extra you want to pay each month, and the software will spit out results. It will tell you how much money you will save following each method. You will also find out when you will pay off your debt.

Next Steps

Debt payoff doesn’t have to be hard. But it does take time and determination.

If you are in need of help, please fill out this form and I will get back to you.

We can discuss which option makes the most sense for you and work together to help secure your financial future.

Which debt paydown strategy will you use?