Paying down debt can be a challenge, and not just because there never seems to be enough money to go around. It’s also tough because when you’ve fallen behind on your bills, creditors and debt collector demands create a sense of urgency that often keeps the debtor locked in short-term thinking. Staving off one collection action and then making a payment to stop the persistent calls from another creditor based on who is most aggressive is a recipe for long-term financial problems.
The critical first step toward reducing debt balances is having a plan.
If you read financial advice, listen to podcasts, or even talk to a financial advisor, you’ll likely hear that there’s a “right way” to pay down debt. Unfortunately, each of these sources may offer a different “right way.” The truth is that there are pros and cons to most strategies for paying down debt, and you’ll have to do the math, get realistic about your priorities and motivators, and choose the one that works best for you in the circumstances you’re in today.
The Two Most Popular Methods for Paying Down Debt
One area of conflict among experts is whether it’s better to pay off your smallest debts first, or preferable to tackle the debt with the highest interest rate right off the bat.
Assuming that you’re putting the same amount of money toward debt each month, paying off debt with the highest interest rate will save you money in the long run. Thus, from a strictly mathematical perspective, that is the best approach. However, many experts advocate paying off your smallest debts first for reasons that have nothing to do with the numbers.
Keep Debts and Household Bills Current
Both methods require you to focus on one debt at a time. But, that doesn’t mean you should stop paying other bills to make it happen. Of course, you’ll prioritize necessities such as your rent or mortgage, utility payments, groceries, automobile insurance and other payments that sustain your ability to live and work. These debt management methods are designed to get the most mileage out of the money you have to pay toward credit cards, outstanding loans, and other debt each month.
The Psychological Element to Paying off Debt
We’ve already established that paying down debt is hard. It requires either generating extra income or cutting back on expenses, and often requires managing competing demands. Understandably, it’s difficult for many people with large debt balances to stay motivated and stay on track. That’s exactly why some experts recommend paying off your smallest debts first.
This method, commonly known as the “snowball” approach, allows you to build momentum by paying off small debts relatively quickly. As you eliminate each of those debts, you can check an item off of your debt paydown list and transfer the funds that were going to that debt to the next smallest. By the time you reach the larger, more daunting debt or debts, you’ll already have made significant, visible progress. That momentum can help carry you forward through the longer-term effort to pay down a large debt.
Which Method is Right for You?
The best method is the one you’re able to stick to long enough to eliminate your debt. If you’re a numbers person, highly motivated by seeing savings and committed to spending the least money possible to pay down your debt, it may make sense for you to start with your highest-interest debt, motivating yourself by calculating the savings in interest as you go.
But, if you need to see more concrete progress to avoid getting discouraged and derailed, pick a debt you can knock out in just a few months and then move on to the next smallest.
Be realistic as you proceed. If you can’t come up with a system that will allow you to make meaningful progress toward paying down debt, or if you try repeatedly and fail to stick with a system, it may be time to seek guidance from a credit counseling agency, bankruptcy attorney, or other professional who can help you assess your situation and make the best decision for your next steps.
The information presented in this post is not legal advice and does not form a lawyer/client relationship. Laws and circumstances can differ and change.
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