An Overview of Debt Repayment Methods

Ansley Bender, Financial Literacy $chool

Improving Your Finances Through Debt Elimination

During the past few decades, consumer debt has skyrocketed. Now, 80% of Americans are in debt, and the average American has a credit card balance of over $6,000. Considering debt’s prevalence in ordinary life, it’s understandable that we tend to turn a blind eye to our own situation. However, paying off debt has the highest return on investment of any financial decision and therefore, should be a financial priority. By paying off debt, the interest previously paid to creditors can instead be saved or invested to ensure financial preparedness in an unpredictable world. Getting started is simply a matter of choosing a debt repayment plan that aligns with your unique goals and motivations.

Common Debt Repayment Methods: Avalanche vs. Snowball Method

The two most popular debt repayment methods are the avalanche and snowball methods.

The avalanche method prioritizes the debt with the highest interest rate, saving you the most interest over time. However, if the debt with the highest interest rate is also quite large, it can be difficult to stay motivated.

On the other hand, the snowball method prioritizes the debt with the smallest balance. The justification is that quickly paying off several small debts will build the momentum needed during the repayment of the larger, more grizzly debts.

A Grittier Approach

A more unconventional method comes from Ty Roberts, the personal finance blogger behind Get Rich Quickish and CampFIRE Finance. He suggests making debt repayment personal by “attack[ing] whatever debt you despise the most, regardless of the loan balance or the interest rate.” This method is a brilliant use of psychology as it plays to ones intrinsic motivation to eliminate debt attached to bad memories, such as a vacation with an ex or a shopping spree for clothes that no longer fit.

Staying Motivated to the End

Regardless of the method chosen, debt repayment is a slow, uphill battle requiring grit and determination. To increase the likelihood of success, try one of the following tricks:

  1. Visualize your path toward debt freedom and become familiar with how wonderful it will feel to finally be debt free.
  2. Understand the impact that becoming free of debt can have on your monthly budget as well as your saving and investment portfolio.
  3. Develop a growth mindset in which you take control of your financial future and steer it in your favor.
  4. Know your unique motivations and short-comings and develop ways to play to your strengths.
  5. Automate your debt payments to remove the temptation to spend money earmarked for debt on something else. If you want to go super hardcore, try using cash instead of plastic.

No matter what you must temporarily forego in the pursuit of debt freedom, those sacrifices will pale in comparison to the financial possibilities open up to you once you are no longer beholden to creditors and your money is truly your own.