Debt is such a taboo topic that no one talks about it. Yet, the banks, schools and retail stores are quick to offer it. In this day and age, most of us carry some form of debt. It could be student loans, credit cards, lines of credit, a mortgage, car loans, etc. We live in a society of “buy now, pay later” and instant gratification.
Stop being ashamed or embarrassed
It doesn’t matter if you lost your job and had to use credit to make ends meet. Or if you went overboard shopping, eating out or taking a vacation. Debt is debt and if not managed properly can have devastating effects on you mentally and emotionally. In fact, 1 in 5 people consider suicide as an option. And that should NEVER be an option!
Do not feel as though you are alone or hopeless. There are better options available and I promise you that if you commit to making change, it is possible to get yourself out of debt despair.
I’m here to tell you that 95% of people don’t know what to do about their debt.
Are you living beyond your means?
In other words, are you spending more than you are making each month? Unfortunately, many families may not even realize it because they don’t keep track of their spending or have a budget. I used to work with Lawyers and their families. They live using their credit cards for daily purchases and their line of credit to pay bills. When they got a quarterly or yearly bonus, it went to paying down the line of credit. It simply became an endless cycle of one debt being used to pay down another debt.
They became used to a certain lifestyle and thinking they earn a good wage continue to spend. Then, their debt grows and grows until it’s overwhelming. And it’s this overwhelming debt that causes a lot of stress and anxiety for families trying to make ends meet.
Paying off debt is NOT easy
The truth is that debt when used correctly is a great option. It’s when you over-extend yourself that it becomes so stressful. We simply aren’t taught money management growing up. For some reason, it makes more sense for us to learn how to calculate the interior angle of a triangle in school than it is to teach us how money works!
It isn’t because you aren’t trying. You work hard and keep up your minimum payments each month. But, the balance isn’t going down and it seems impossible to move forward. Unfortunately, the average person doesn’t understand how to maximize their payments to get rid of their debt.
Instead, they attempt to pay down their debt evenly. What I mean is that if I owe money to 3 credit cards, I will try to pay them all down at the same time. So, if I have an extra this month, I would put $100 on each of these cards. And while this may seem logical, it’s not the most beneficial.
There is a better, easier way. In fact, there are 2 highly effective ways to pay down your debt faster.
1 – Debt avalanche method
In the debt avalanche method, you pay off debt with the highest interest rate first. That does not mean your highest balance (which is how I have seen others explain this method). Once you’ve paid off the highest interest rate debt, that payment gets added to the monthly payment of the next highest interest rate debt. And you continue until all debts are paid off. This method allows you to pay the least amount of interest overall. Instead, you use that interest savings towards paying down the principal.
For example, if you have the following:
- Credit card A $10,000 @ 18.99% ($200 min) Highest Interest Rate
- Car payment $4,000 @ 7.5% ($75 min) Smallest Balance
- Student loan $15,000 @ 4.9% ($160 min)
With the debt avalanche method, you would pay off your credit card first. So, if you had $600 you can use towards your debts, you would pay $365 on your credit card, $75 towards your car and $160 towards the student loan. Once the credit card is paid off, you would pay $440 towards your car and $160 towards the student loan until the car is also paid off. Then you’d put the full $600 towards your student loan.
| Payment | Credit Card | Car Payment | Student Loan |
| $600 | $365 | $75 | $160 |
| $600 | paid off | $365 + $75 | $160 |
| $600 | paid off | paid off | $365 +$75 + $160 |
2 – Debt snowball method
With the snowball method, you pay the lowest balance off first. This helps you to keep motivation and dedication because you can get rid of the lowest amount owed paid off the quickest. Thus giving you the quickest win to motivate you to continue.
In the above situation, you would pay your car payment first. So, that same $600, would break down to $200 towards your cc, $240 towards your car and $160 towards the student loan. Once your car is paid off, you would increase your CC payment to $440 and still pay $160 towards the student loan. Once the CC is paid off, you’d pay the full $600 towards your student loan.
| Payment | Credit Card | Car Payment | Student Loan |
| $600 | $200 | $240 | $160 |
| $600 | $200 + $240 | paid off | $160 |
| $600 | paid off | paid off | $200 + $240 + $160 |
Which one is better?
Theoretically, if you looked strictly at the numbers and how much interest you had to pay, you would use the debt avalanche method. But, if you looked at human behaviour, the debt snowball method give you a feeling of accomplishment faster.
Several studies, however, shows the following:
Kellogg School of Management
This study showed that people with large balances are more likely to stick with their debt payoff plan if they focus on smaller balances first.
University of Michigan
This study showed that participants tended to naturally follow the snowball method. They called it the “debt account aversion”. However, when they were shown how much interest accrued on each debt, they were able to focus on higher interest rate debts first.
Boston School of Business
This study was the most interesting. First, if people focus on paying down one account at a time, they are more successful than those who spread payments across accounts. Second, they felt their progress more keenly and were more motivated by paying one account at a time. And lastly, they are more motivated to pay off the smallest amount first.
What should you do?
It simply depends on what is going to keep you motivated to reach financial freedom! For some, with a plan, they like knowing it will be over sooner using the avalanche method. For others, they want to see those quick wins to keep their motivation high.
The most important factor was focusing on one debt at a time.
What about my mortgage?
Paying off a mortgage is not something I recommend. The average person may not agree with this. They view debt as a bad thing no matter what. They don’t understand that there is good debt and bad debt.
Let me explain. A mortgage usually has a low rate of interest. It also builds your overall net worth. Because of this and the benefits of compounding interest, I would advise keeping the mortgage and instead investing the extra funds for your future especially retirement.
Why listen to me?
I have personally had experience with paying off $45,000 from student loans and credit card debt within 5 years on a low income. But, mostly because I have worked with hundreds of clients to help them with their finances and investments.
I spent 8 years working in Investment Banking, Insurance and Financial Planning. As a young female in a male dominated industry, I worked hard to earn multiple designations and give my clients the best advice possible.
I have a Financial Management Advisor designation and have completed the Financial Planning and Wealth Management courses. Everything I recommend is based on sound financial strategies backed by years of experience. I even have tips and tricks only the rich use.
Next steps
No matter what your situation, there are options and ways to improve your financial situation. Having a plan can have a profound effect on not only your financial health but also your peace of mind. Make sure to keep track of what you are paying off first and how much to apply to each debt with my FREE Debt Eliminator worksheet NOW!
Related:
A surefire way to save interest on credit card debt
How To Manage Money During A Financial Crisis