How to Plan the Ultimate Debt Payoff Strategy
Debt can often have a negative connotation, but there are plenty of good reasons to have it – for example, using student loans to increase your earning potential, funding an entrepreneurial venture with a small business loan or going to the “Bank of Mom & Dad” to pay for a move across the country for a great job.
But even when you have debt for good reasons, actually being in debt can feel pretty bad – especially if high interest rate credit cards are monopolizing your monthly paycheck and costing you a fortune over the long run.
So how do you use debt to your advantage without letting it get you down? The key is to be proactive about paying it off. Luckily, there are plenty of great resources and proven techniques to help you plan your payoff strategy. Here are three to consider:
#1 Customize your approach
The words ‘snowflake,’ ‘snowball’ and ‘avalanche’ might sound like an increasingly alarming day on the mountain, but these terms also apply to three popular debt payoff methods – one of which may be just right for you.
As Melissa Batai from Money Crashers explains, “Snowflaking is the process of using extra money gained here and there to pay down your debt above and beyond your planned monthly payment.” You can acquire this extra cash through things like side-gigs, selling the stuff you no longer need and renting out a room in your house.
The Snowball Method entails paying off your debts in order from smallest to largest – regardless of their respective interest rates. “The benefit . . . comes from seeing one of your debts paid off sooner,” says Darren Wu from Wisebread. “This, in turn, can provide an emotional boost.”
But Snowballers beware – ignoring interest rates usually means paying more money in the long run. If savings is your main priority, you’ll probably want to look at the Avalanche Method, which has you putting more money toward your higher interest rate debt first. Not only does this approach save you money, “it gets you completely debt-free sooner,” says Darren.
#2 Recalibrate your rate
High-interest rate debt is not only expensive, it can also take forever to pay off. But just because your loan or credit card came with a high rate doesn’t necessarily mean you’re stuck with it forever. For one thing, new options for student loan refinancing have become available in the past few years. And if you have high-interest rate credit cards, you can look into paying them off with a low-interest rate personal loan.
Gerri Dettweiler from Credit.com points out that paying off credit cards with a personal loan can have other benefits beyond just saving money. “With credit cards, it’s easy to fall into the minimum payment trap and drag out your debt for years. By contrast, many personal loans are installment loans, which means they carry a fixed repayment period.” You know exactly when your loan will be paid off, which can help remove the temptation of racking up more debt.
#3 Do a debt detox
People often compare getting fiscally fit with getting physically fit – and with good reason. Whether you’re trying to achieve financial goals or health and fitness goals, you’re more likely to be successful if you have a good plan in place, a fair amount of willpower and a desire to change your habits.
Recommended: Consult our Credit Card Interest Calculator and discover how much you are paying in interest alone on your debt.
That was the approach Anna Newell Jones of And Then We Saved took when she decided to embark on a ‘Spending Fast’, which entailed “spending money on necessities only to see what happens, how much debt I can get out of and how much I can get into savings.” Fifteen months later, she’d eliminated nearly $24,000 in debt and inspired her readers to save over $320,000 by doing the Spending Fast (and its less austere cousin, the Spending Diet) right along with her.
No matter what approach you choose, the key is to take control of your debt rather than let it control you. If you have a solid strategy for getting out of debt, you can remove the negative feelings about it and focus on the positive outcome that your loans provided for you.
Have a debt payoff strategy that’s worked well for you? Feel free to share it here!
The individuals interviewed for this article were not compensated for their participation. Their advice is educational in nature, is not individualized, and is may not be applicable to your unique situation. It is not intended to serve as the primary or sole basis for your financial decisions.
The savings and experiences of members herein may not be representative of the experiences of all members. Savings are not guaranteed and will vary based on your unique situation and other factors.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.