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Best Strategy for Paying Off Debt

February 14, 2018

We are often times asked, “what is the best way to pay off debt?” This isn’t always pertaining to credit card debt. There are all sorts of different types of debt, student loans, car loans, mortgages, and consumer debt (credit card, medical, payday, or overdraft). With household debt increasing across the nation (highest point since the great recession), it is a good idea to put a plan in place to pay debt off.

 

Just as there are many types of debt, there are equally the same amount of strategies for paying off debt. Here is a list of a few strategies. As a side note all of these assume that once one debt is retired, you would use that payment to continue paying off remaining debt until you are debt free.

 

The Equal Pay Method: If you have $1,000 extra to pay off 4 debts you would pay $250 to each debt regardless of size or interest rate.

 

Pay Down the Balance that is Largest: If you have $1,000 extra to pay towards debt, you would pay the minimum amount on each balance and then devote the remainder to the largest balance.

 

Balance Matching: This method involves looking at the relative size of each debt. If you have $1,000 to make payments on two debts, one with $7,000 and one with $3,000 you would pay $700 toward the $7,000 debt and $300 towards the $3,000 debt.

 

Pay Highest Interest First: This involves writing down all your debts in order of highest interest rate to the lowest. If you had $1,000 after making the minimum payment on each debt you would then apply the $1,000 to the debt with the highest rate regardless of balance size.

 

Snowball Method: You would apply the extra money to the smallest balance with the intention of getting that to zero and working your way to the paying off the largest balance.

 

So, of all the methods, what is the best way to pay off debt? Mathematically, it is to pay off the debt with the highest interest rate regardless of balance size, whether that be a car, student loan, payday loan, or credit card debt. Which ever debt has the highest rate of interest, it is best to devote your resources to getting that paid off and then moving your way on down the list until you are debt free.

 

However, what may make sense on paper isn’t what will work best for you. In a recent study highlighted by the Harvard Business Review showed that paying off debt isn’t so much about dollars and cents, but about motivation. They “tested a variety of hypotheses and ultimately determined that it is not the size of the repayment or how little is left on a card after a payment that has the biggest impact on people’s perceptions of progress; rather it’s what portion of the balance they succeed in paying off.” In other words, people are motivated to pay off debt when they can see that they are making progress. This motivation helped to keep people to continue paying off debt instead of losing steam.

If you have debt that you want to pay off, there are several ways to do so, the key is to find the strategy that will keep you motivated to become debt free and to lighten your financial burden.

Thank you for the opportunity to work with each of you. We wish you success in all you do.

 

 

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