While you can inch your way out of debt by making minimum payments over the next 50 years, I’m going to guess you’re looking for debt reduction strategies that will work more quickly than that! Well, with the Debt Movement upon us, and being a savvy WSL fan, it’s time to talk about how to pay off debt quickly and discuss some easy debt reduction strategies that you can implement!
One of the most common (or at least well-known) strategies for debt reduction is the debt snowball method. If you’re a fan of Dave Ramsey then you’ve likely heard of this method, and for many years, it’s one that we implemented here at the WSL house.
The snowball debt reduction strategy entails paying off your debts from SMALLEST to LARGEST. You don’t take interest rates or minimum payments into account, but rather focus on the total payoff amount.
Here is how you implement the snowball debt reduction strategy:
The reason this is called the “snowball” debt reduction strategies is because once you eliminate the smallest debt, you then have that minimum payment to help pay off your next smallest debt. With each debt that’s eliminated, the minimum payments you’re saving begin to add up (or snowball) and you’re able to pay larger monthly payments by the time you get to your bigger debts.
While there is no “right or wrong” strategy to reduce debt, each these easy debt reduction strategies are viable options and it’s important that you choose one that works best for you. With that said, mathematically, paying off the highest interest debt FIRST makes the most sense and is likely the most effective of the debt reduction strategies.
Despite that being the case, the debt snowball method is one of the strategies people like because the psychology involved with winning and feeling/seeing progress is extremely motivating! Realistically, you will be able to knock out your smallest debt rather quickly (and therefore feel more motivation as you believe you’re making progress).
However, when you focus on the highest interest rate FIRST, that may also mean you’re stuck paying off your LARGEST debt, first. If that’s the case then it may take you months to finally pay off that debt and it’ll be awhile before you truly feel you’ve accomplished anything. So, psychologically this may not be the best of the debt reduction strategies. However, mathematically, it is.
How to implement the highest interest rate debt reduction strategies:
Debt consolidation is often a misunderstood debt reduction tool, partly because there are multiple ways of doing it and partly because not everybody understands what it is. The reason I’ve included debt consolidation as one of the debt reduction strategies that you should consider is because I used it myself and it was an integral part of helping me reduce my debt.
There are two primary types of debt consolidation: (1) is when a person uses equity in an asset or obtains a new loan and “consolidates” multiple debts/monthly payments into one “new” monthly payment. (2) The second involves working with a debt consolidation company. This company negotiates lower interest rates (on your behalf) and possibly a lower monthly payment. Once you’re in the program, you no longer make individual payments to each of your creditors. Instead, you make one “consolidated” monthly payment to the debt consolidation company and they then pay each of your creditors individually (on your behalf).
Is debt consolidation a good idea depends on which option you choose. In the article I just linked to, we explain very clearly why the first option isn’t a great solution for most people. However, the 2nd method I explained is the one I personally used and I’ve suggested to clients in the past.
Debt consolidation isn’t for everybody though: you may need a larger amount of debt to qualify for such a program and it’s possible that you need to be behind on your payments in order for your creditors to budge on their interest rates. Saying that, I simply encourage you to research a few companies, give them a call, and see what they may be able to do for you.
The GREAT thing about debt consolidation and reduction strategies (once you’re in the program) is this:
While there are some obstacles to debt consolidation, it is generally a decent proposition for both the creditor and the consumer. It’s good for YOU because you get to lower your interest rates, only worry about 1 payment each month, you can’t go further into debt, AND you’re on a 5-year payoff plan (but, with lower interest rates, hopefully you can pay it off faster!!). It’s also good for the creditor because they are promised to get their money back within a specific period of time and they know you’re not out racking up more debt.
The final of the easy debt reduction strategies involves transferring your high interest rate credit cards to low (or 0%) interest credit cards. Generally, I’d suggest using this method in conjunction with either the debt snowball or high-interest rate debt reduction strategies.
The balance transfer strategy is very easy to implement:
The balance transfer strategy is a great one because you don’t have to do anything and you’re going to save some money (which means you can pay more towards reducing debt!). Please realize though, that this strategy isn’t going to be the only thing that will get you out of debt, you must still couple it with option #1 or #2 above.
There is no “right or wrong” method to pay down debt. What’s important is that you analyze each method, develop a plan and determine which one(s) suite your situation, then implement one these easy debt reduction strategies.
If you’re just starting to focus on paying down debt, I’d suggest utilizing the balance transfer strategy in conjunction with the debt snowball method. Once you’ve eliminated some of your smaller debts (and their monthly payments), then focus on paying off the high-interest rate debts and forgo the snowball method.
Readers: did you have any debt reduction strategies that you used when paying down debt (or currently use)?
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