Two Proven Methods to Pay Off Debt

We all know the feeling; debt can hang over our heads like a storm cloud. But remember, debt is a part of your total financial picture, so it just comes down to learning to manage it well and work to pay it off in a way that makes sense for your financial goals.

It’s common for households to have more than one type of debt, and it’s important to know those types of debt because they can play a key part in a debt payoff strategy. There are two broad categories of debt: secured and unsecured. Secured debt is backed by collateral such as your home or car and usually comes with a lower interest rate. Unsecured debt is much riskier (and expensive) because it’s not secured by collateral; this would include credit cards, personal loans, and student loans.

As you’re thinking about how to pay off your current debt, you may be wondering how to prioritize. The two most common debt prioritization strategies are the snowball method and the avalanche method. Here’s an overview of each:

Snowball method

The snowball method prioritizes paying off the lowest balances first. There’s a positive psychological boost to zeroing out a debt account, which can then be used as a springboard to tackle the next chunk of debt. It’s not financially preferable if you have a lot of high-interest debt, but it can be a good approach if you have small amounts of debt with several lenders.

Avalanche method

This approach prioritizes the highest interest rate first, regardless of the balance. The goal is to minimize the amount of interest you must pay while you work to retire the debt. That’s because interest paid is money that doesn’t reduce how much you owe; it just goes into the company’s pocket that lent you the money. The avalanche method is the mathematically optimal way to pay off debt but it may not be right for everyone.

Paying off debt starts with a firm grasp of your spending and savings habits. If you’ve already accumulated a high amount of debt, you don’t want to add to the pile! Once that’s done, paying off debt is a matter of staying motivated!

If you need help creating a debt payoff plan, don’t hesitate to reach out. Together we can look through your entire financial picture and determine the best place to start to reach your short and long-term financial goals.