Three Ways to Pay Off Your Debt

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Are you trying to pay off your debt? If so, then you might be wondering how you should proceed. What’s the best strategy for paying off your debt?

As it turns out, there are three popular methods: the “traditional” method, the “snowball” method, and the “annoying” method. Let’s look at the pro’s and con’s for these popular debt payoff techniques, so that you can decide which one is best for you.

Traditional Payoff Method

Under the traditional model, a person would first make a list of all of their debts, from highest-interest-rate to lowest-interest rate. For example, you might list:

  • Mastercard, $12,000 balance, 14 percent APR
  • Student Loan, $32,000 balance, 8 percent APR
  • Car Loan, $3,500 balance, 3 percent APR
  • Loan from Brother, $5,000 balance, 0 percent APR

DebtA person would make the minimum required payments on all of the above loans, and then use additional money to pay off these loans in the order listed above, from highest-interest to lowest-interest. In theory, this saves the most in interest payments over the life of the loan, and mathematically, this strategy makes the most sense.

Snowball Method

However, another popular method coined by Dave Ramsey advocates ordering your debts based on balance, rather than interest rate. For example:

  • Car Loan, $3,500 balance, 3 percent APR
  • Loan from Brother, $5,000 balance, 0 percent APR
  • Mastercard, $12,000 balance, 14 percent APR
  • Student Loan, $32,000 balance, 8 percent APR

A person would then pay off the smallest-balance-loan first. They’d feel the mental thrill of victory when they got rid of that debt. Then they’d pay off the next, and then the next. Mathematically, this doesn’t make as much sense, since the person would be paying off lower-interest debts first. But mentally, this could help motivate a person to keep going.

Annoying Method

As another option, a person might order their debts based on “most annoying to least annoying.” For example, perhaps that loan from your brother really bothers you and keeps you awake at night, while your student loan doesn’t bother you at all. Or, perhaps the tables are reversed: your student loan bugs you, while the loan from your brother doesn’t.

In this third option, you’d pay off the most annoying loan first, before moving onto the next. This option ignores both the balance and the interest rate, and purely focuses on the psychological impact of the loan.

What’s the Best?

Which of these is the best option? There’s no single right answer. There are some people who fervently believe that paying off loans based on anything other than the interest rate is a sub-optimal idea, and there are others who say that they’ve tried and tried to pay off their loans through a variety of methods, and found that the snowball method works best.

This might be hard to hear — many people want a solid answer — but there’s also a certain liberation that comes from the knowledge that you can pay off your debts in any order that you’d like. Pick whichever route works best for you, and stick with it. The most important detail is that you’re paying off your debt, regardless of the strategy that you prefer.

Are you working to pay off your debt?

Read another one of Kennedi’s posts: 10 ways to save at the grocery store.

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Get Out of Debt

Derek

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

7 Comments

    • I read about the ‘annoying method’ somewhere — I forget where — and it really resonated with me. After all, the most-annoying-debt is probably also the one that you’d be the most motivated to get rid of!
      Kennedi recently posted..Space-Saving Tip of the Day

  1. Paying off debt is a difficult but not impossible. You need to pay your debt money as much as possible and try to generate more income sources like working extra on weekends. I have paid more than $8000 of debt by reducing my expense and working a little bit harder.

    • Congrats on paying down your debts! I can’t wait to get rid of mine soon!

  2. I recently wrote a post similar to this. In the end, the method you chose isn’t as important as the end goal – getting out of debt. As long as you do this, the method you chose isn’t much of a factor.
    Jon @ Money Smart Guides recently posted..Benefits Of Paying Off Debt

    • True Jon. The main thing is ditching the debt and sticking to it! Thanks for the comment.


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