The Top 2 Ways to Get Out of Debt
Aug 17, 2024Read time - 3 minutes / Disclaimer
Today let's review the top 2 ways to get out of debt.
Having no debt allows you:
• Less stress.
• More savings.
• Greater freedom.
Unfortunately, debt can be hard to avoid.
Debt Is Everywhere
When you turn 18 you're immediately offered:
• Car loans.
• Credit cards.
• Student loans.
Getting into debt is easy.
Which can lead to bad outcomes.
Fortunately, there are helpful tools to get out of debt.
I had $55,000 in credit card debt in my late 20s.
These 2 tools helped get me out:
1. Debt Snowball
A step-by-step plan is the best way to get rid of debt.
That's exactly what the Debt Snowball provides.
How it works:
1. Make a list of all your debts.
2. Sort the list from smallest to largest debts.
3. Keep making your minimum monthly payments.
4. Focus on paying off your smallest debt first.
For example:
If these were your debts—
This is how you'd pay them off:
Credit Card
$1,000 balance (pay 1st)
Credit Card
$3,000 balance (pay 2nd)
Auto Loan
$9,000 balance (pay 3rd)
Student Loan
$19,000 balance (pay 4th)
After the smallest debt is paid off, move on to the next smallest debt.
As each account is paid in full, you'll have more money to tackle the next debt.
Why does the Debt Snowball suggest you pay off debts from smallest to largest?
A few quick wins help motivate you to keep going.
2. Debt Avalanche
The Debt Avalance is also a step-by-step plan.
How it works:
1. Make a list of all your debts.
2. Sort the list from highest to lowest interest rate.
3. Keep making your minimum monthly payments.
4. Focus on paying off your highest interest rate debt first.
For example:
If these were your debts—
This is how you'd pay them off:
Credit Card
24% rate (pay 1st)
Credit Card
21% rate (pay 2nd)
Auto Loan
10% rate (pay 3rd)
Student Loan
7% rate (pay 4th)
After the highest interest rate account is paid off, move on to the next highest rate.
As each account is paid in full, you'll have more money to tackle the next debt.
Why does the Debt Avalanche suggest you pay off accounts from highest to lowest interest rate?
Paying off in that order saves you the most money.
Which Way is Best?
I suggest using both tools.
Start with the Debt Snowball.
After paying off 1 or 2 smaller accounts, switch to the Debt Avalanche.
Why?
Paying off a few smaller accounts first will motivate you to keep going.
Paying off high interest rate debt next will save you the most money.
Conclusion
Paying off debt is a pain.
But the rewards are worth it—
Less stress, more savings, greater freedom.
That's all for today.
See you next week.
