When my husband and I were drowning in debt, we had to decide which debt to pay off first, second, and finally third. We had $100,000 of consumer debt that we wanted to pay off and we were able to pay it off in less than 2 years. I am so happy we paid off our debt quickly because I was under so much stress, I felt extremely overwhelmed, and I had a lot of anxiety prior to becoming debt free (besides our house). Now, I feel safe and secure in my finances, and you can too!
You will need to decide which debt pay-off method you want to use. There are 2 main types to choose from, the debt snowball and the debt avalanche. There are pros and cons to both methods. Which one you choose will depend on your goals and personality.
The debt snowball method is when you take all your debts and line them up in order from the SMALLEST total balance due to the highest total balance due. You pay the minimum monthly payment due on all the debts except for the smallest total balance debt. You want to pay off the smallest balance debt as quickly as possible.
The debt avalanche method is when you take all your debts and line them up in order from the HIGHEST INTEREST RATE to the lowest interest rate. You pay the minimum monthly payment due on all the debts except for the one with the highest interest rate. You then pay off the highest interest-rate debt as fast as you can.
In both methods, you are going to pay off the first debt as quickly as possible. Well, that is the idea anyways. How quickly will depend on your goals and visions for what you are trying to accomplish in life besides paying off your debt.
Once you have the first debt paid off in both debt pay-off methods you will then roll your minimum monthly payment that was due for the first debt onto the second debt.
Let me give you an example of each.
Debts:
· Credit Card #1 has a total balance of $2,000 with a minimum monthly payment of $120 and an interest rate of 28%
· Credit Card #2 has a total balance of $1,200 with a minimum monthly payment of $90 and an interest rate of 24%
· Car loan has a total balance of $20,000 with a minimum monthly payment of $450 and an interest rate of 5%
Using The Debt Snowball Method:
Pay Credit Card #2 first, and pay the minimum monthly payment on credit card #1 and the car loan. Once you pay off credit card #2, you will pay an extra $90 onto your credit card #1 monthly payment. So, you would be paying $450 for your car loan and $210 for your credit card debt per month.
Using The Debt Avalanche Method:
Pay Credit Card #1 first (because it has the highest interest rate at 28%), and pay the minimum monthly payments on credit card #2 and your car loan. Once you pay off your credit card #1 balance, you would then put $120 plus $90 onto your credit card #2 balance until that debt is paid off completely. Then you put $120 +$90 + $450 per month onto your card loan until that is paid off completely.
The debt snowball method is great for those with a smaller debt balance so that you can see and feel the “quick wins”. You will get to pay off your first debt and possibly your second debt quickly and you will feel good from seeing your debt being paid off. This will keep you motivated to keep working hard, selling things, and paying as much as possible onto your debt.
The debt avalanche method is great because you will be saving the most money by paying off the high-interest-rate debt first. It may or may not be the lowest debt balance that you are paying off first, so it might take you longer to see that first “win” of paying off a debt completely. If you are looking at saving the most money, this is the best method for you.
There is no “wrong” way to pay off your debt. As long as you keep working on paying off your debt quickly. You will need to decide how aggressively you want to pay off your debt. Would you rather pay off your debts as soon as possible and potentially miss out on time and experiences with your kids and family? Or would you rather pay off your debts at a slightly slower speed while still spending time and making memories with your children? There is no right or wrong answer here.
When my husband and I paid off our debt we worked a lot of long hours. I worked a ton of overtime as a Registered Nurse, and I picked up more photography sessions. All the extra income we earned we put towards paying off our debt sooner. We decided to keep our 3 boys in their youth sports and extracurricular activities. We still went out to eat (just not as often). We still went camping and made memories, we went to the zoo, stayed in hotels for sporting events, and bought some things we didn’t need.
We did however begin budgeting, cut way back on our spending, and even ended up selling our 1-year-old destination camper that was like a second home to us. I had to say “no” often, and I am so glad I did. Because every “no” got us closer to our goal of paying off our mountain of debt. With each dollar we put towards our debt it brought me closer to feeling safe and secure.
It is important to have a starter emergency savings account/fund while paying off debt. I suggest having at least $1,000 in this savings account, preferably $1,500-$2,000. This money is to be ONLY for emergencies. Trust me, having this money set aside will help prevent you from going further into debt. It is not a question of “if” an emergency will happen, but “when”. Most of our emergencies have cost us over $1,000, so that is why I often encourage my clients and friends to have more than $1,000.
Once you are out of debt, or at least have paid off your high-interest-rate debts, then you can work on building a big juicy emergency fund! If you have stable employment, having 3-6 months’ worth of monthly expenses in your emergency fund should be fine. However, if you are self-employed or you don’t have the most stable job (remember 2020 when SOOOO many of us were furloughed, me included) then I recommend having 12-18 months of your monthly expenses in a savings account, again to be used only for an emergency.
Remember, paying off your debt is important so you can keep more of your hard-earned income. When you have debt, you owe money to someone else. You are making the credit card companies and banks rich by paying interest instead of keeping that money for yourself and your family. Saving up and paying cash for purchases is a great feeling. You only pay the “sticker” price of the item you are buying. No more paying money to the lender!
What would your life look like if your credit card debt was gone? What if you were debt free besides your house? What would it feel like if you were 100% debt free? How about if you had a fully funded emergency fund in place?
The answers to these questions can come true. You, my friend, can pay off your debt and build a big juicy bank account. Sure, it’s not going to happen overnight. It is going to take dedication, time, hard work, and motivation. But you can do it. If I can do it, you can too! I have faith in you and you need to have faith in yourself.
Make a list of your goals, dreams, and visions for the short-term and the long-term. Write out your dreams for how you will tackle your debt. Then write out each goal and the steps to get you there. This will help get you to becoming debt free sooner.
Grab an accountability partner, and a budgeting buddy to keep you motivated and accountable. Having someone to support and empower you and keep you on track will be a huge benefit. If you aren’t sure who to ask, think about hiring a Money Coach, this is what they do!
You can check out my 1:1 Money Coaching program at Jesswaynecoaching.com. I also have some self-paced online money management courses and a podcast as well. And if you haven’t already taken my FREE Budgeting 101 online course, be sure to check that out!
