There's Only One 'Best' Way To Pay Down Debt

Trying to get out of debt can be a frustrating, time consuming, and downright depressing. The good news is if you take the right steps it doesn’t have to be any of those things for long.

The trick to paying down debt is all in the strategy. Most people are going to have a hard time becoming debt free without a good strategy to follow. A google search on the fastest method to pay off debt yields 1.45M responses. So, the real challenge is choosing the right method from a myriad of options. Below are three commonly used strategies.

SNOWBALL METHOD

The Snowball Method is most applicable to individuals who have more than one account that needs to be paid. With the Snowball Method you start by listing all account balances in lowest to highest order. Once accounts are organized you pay as much as possible on the account with the lowest balance while making the minimum payments on all other balances (and not adding any new debt). Once the first account is paid in full you move to the next one paying as much as possible while continuing to pay the minimum balance on all other accounts.

Why it works: You’re able to systematically increase your payments on debts which helps to pay them down faster. And for some people the accomplishment of paying off one card is a strong motivator.

Cons: You may end up paying more over the long run since you’re organizing debt by balance and not by cost (or interest rate).

AVALANCHE METHOD

This second ‘wintry weather’ method is very similar to the Snowball Method. In this case instead of organizing debts by balance owed you would organize them by interest rate. Pay as much on the account with the highest interest rate while making the minimum payment on the other accounts until the highest rate balance is paid off.

Why it works: Paying the balance with the highest interest rate reduces the overall amount of money you spend trying to pay off debt.

Cons: If you’re highest rate balance is also not your lowest balance then it will take longer to pay the balance in full. This may be demotivating to some.

BALANCE TRANSFER METHOD

With the Balance Transfer Method you transfer your outstanding balance from one account to another with a lower interest rate. With a reduced interest rate, more of the money that is being paid each month is going to principle which will help reduce the outstanding balance faster.

Why it works: More of your monthly payment goes to the actual principle of the debt rather than interest. When more money goes to the principle then the balance can be paid off sooner.

Cons: This method can backfire if the full balance is not paid before the end of the lower interest rate term when interest from the entire term may be added to the balance. Additionally, most balance transfers have hidden fees ranging from 2%-5% which increases the overall balance on your debt.

THE SECRET

Each of these strategies, and a hundred other ones, can increase the likelihood of getting out of debt. But that doesn’t answer the original question of which strategy is the ‘BEST’ strategy. The secret is…

The BEST strategy is the one that works for YOU. It's the one that you can stick with long term and it's the one that will help you accomplish your goal of debt freedom.

Your financial situation and personal motivation will be different from the next guy’s so it is hard to identify one debt payoff methodology that will work for everyone. Some people are motivated by quick wins and seeing progress faster while others are more motivated by knowing how much they’ll save in the long run. The only method that applies to everyone is to organize your debts so you know what your goal is and then make a plan, and stick to it.

And once you get out of debt you’ll have to stop those behaviors that got you in debt in the first place. Otherwise, all your hard work will have to be repeated.

Good Luck

Daysha Carter is a personal financial coach based in Seattle, WA. If you’re struggling with your finances and want assistance getting to the next level schedule a free consultation at www.everydaybudgeting.com.