You need a strategy to pay off your debt. Going in blindly and making payments wherever you can isn't effective enough. You might get through the debt eventually, but most likely you'll struggle along for much longer than you need to (or even find yourself back in debt). There are fast and proven strategies to getting out of debt and if you follow them, then you can be the next person out of debt. There are three main strategies for getting out of debt.
The first is the snowball strategy, made popular by Dave Ramsey. The snowball strategy has you place your debts from smallest to largest (the amount of money you owe). Don't include your mortgage in this list if you have one. You will then pay your minimum payment on every debt, except the smallest. For the smallest debt, you pay the most you can beyond the minimum payment. Once you pay that off, you take 100% of that monthly payment and put it towards the next debt. When you move 100% of the monthly payment from the previous debt, this is added to the minimum payment you're already paying. Then, just rinse and repeat until all the debt is paid off.
The avalanche strategy works a little differently. Instead of placing your debts from smallest to largest, you order by the interest rates from largest to smallest. Again, if you have a mortgage, don't include it in this list. The idea is that you want to pay off the debt with the largest interest rates first to minimize the amount of interest paid and the amount of time spent paying off debt. From month to month, you tackle the your debt the same way you would if you were doing the snowball strategy, except you're focusing on your debt with the largest interest rate first. All the other debts, you continue paying the minimum payment.
The tornado strategy is almost exactly the same as avalanche, except what you do prior to starting. With the avalanche (and actually the snowball too), you start by building a small emergency fund. Typically, this emergency fund is about $1000. The tornado strategy skips the emergency fund and starts implementing the avalanche strategy immediately. But, what happens if an emergency occurs? The tornado strategy says since you're already in debt, you just use debt to cover emergencies and work it into your strategy wherever the interest rate falls in the process.
Which is best for you?
Out of the three strategies, the avalanche strategy is what I would use. Avalanche gets your debt paid off faster with less money, when compared to the snowball strategy. I don't like the tornado strategy's way of handling emergencies. We need to get out of the mindset of using debt for emergencies. Also, if you're trying to get out of debt, why would you go back into it? Regardless, there are still people out there that the tornado strategy is best for. I don't think there's a one size fits all strategy when it comes to paying off debt. You need to choose the one that's the best fit for you.
Choose the snowball strategy if you're not very good with your finances or new to personal finances. Finances are 80% behavior and the snowball strategy aims to capitalize on this. Since you're paying the smallest debt first, you'll probably pay it off in a month or two (sometimes less!). Once that first debt is paid off, there's a huge momentum boost. Finally, you're gaining some ground and it gives you the energy to tackle the next one.
Choose the avalanche strategy if you can. Like I said before, I think the avalanche method is the best out of the three. It will get you out of debt fast and with less money. This strategy takes more discipline than the snowball strategy. I wouldn't recommend it if you have a hard time with patience or struggle with your finances from month-to-month. But, if you think you can power through, then this is the best choice.
Choose the tornado strategy if your debt is small. I would only use this strategy if my debt was very small. Remember, "small" is relative to your income. So, $3000 of debt is small to someone making $100k, but not small to someone making $20k. I would further define small as a debt you could have paid off in no more than 3 months. My idea is that if you can just get the debt out of your life, then you can move on and be done with it. Since it's short term, the likelihood of an emergency happening is small, but of course you need to consider your situation. If your car breaks down every week, then you shouldn't use this strategy because you'll likely have a car emergency. If you have a lot of debt, you should NOT use this strategy. I highly highly recommend you doing one of the first two strategies, because I don't like the idea of going back into debt while you're trying to get out of it.
I'll be explaining each strategy in more depth, with numbers and examples in future posts. If you have a question about a strategy, or wondering how you can get started with one, please reach out to me! I want to help. Also, please subscribe so you don't miss a post!
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My name is Corey and I have a passion for budgets and personal financing. I can talk about it for days (weirdly enough). Hope you enjoy the blog!
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