2 Ways to Melt Away Your Debt

Most of us have dealt with debt at some time in our lives, whether it’s a mortgage, student loans, or a car payment. And while some debt often feels inevitable, it’s easy to get in over your head. Maybe you had to handle a financial emergency by using credit or you’re trying to escape an unhealthy spending habit, but now you’re struggling to get out from under multiple different creditors. Adding another layer to an already stressful situation, a recent study revealed that 48% of Americans who have debt also have difficulty sleeping, 40% expressed increased anxiety, and 34% reported that they deal with depression. Debt clearly takes a heavy toll on more than your bottom line! Luckily, paying off your balances is as simple as finding out what motivates you. Once you know that, it’s easier to stick to a plan and dig yourself out from a snowbank of interest rates. Ready to let it go? Let’s dig into two easy ways to go from whiteout conditions to debt-free.

The Avalanche Method

If you’re highly motivated by saving money, the avalanche method can be a great tool to help you pay off debt. With this strategy, you’ll need to lay out the details of all of your debt and rank them by interest rate, highest to lowest. Make the minimum payment on every loan or account each month, and add any extra funds to the balance with the highest interest rate. Once you’ve paid off the most expensive loan (the one with the highest interest rate), re-allocate everything you were paying on it towards the next most expensive loan.

The avalanche method saves you the most money in the long run by targeting the highest interest rates, which can be extremely rewarding. However, the most expensive loans often take longer to pay off, which could lead to discouragement and a loss of momentum. It also works best if you have consistent, extra income to put towards debt repayment. If your financial situation changes, your progress may slow down.

The Snowball Method

The snowball method allows you to pick up momentum, much like a cartoon-esque snowball rolling downhill. Instead of arranging your debt from the most expensive interest rate to the least, you’ll focus first on the debt with the smallest overall balance. Again, make the minimum payment on each loan every month, adding whatever else you can afford to your payment on the smallest loan. Once that first one is paid off, add the total amount you were spending on it to your payments for the next smallest loan.

While the snowball method means you’ll pay more in interest in the long run, the psychological empowerment of seeing your progress sooner can help you feel motivated and stay on track. If checking tasks off of to-do lists and seeing measurable results is what drives you, this can be a great strategy for you.

Smart About Debt

So, what’s the right way to tackle that mountain of debt? The way that works for you! The important thing is to use whatever tools will best help you dig out from under debt. Once you’ve paid off your loans, don’t stop there. Having a financial strategy in place and sticking to it will help you stay out of debt in the future. You can redirect the money you were spending on loans to an emergency fund and then to a personal escrow fund, which we call Buckets 1 and 2, respectively. With an emergency fund in place, you can navigate the loss of a job or a medical crisis without going back into debt, and a personal escrow fund helps mitigate the financial impact of expected and unexpected expenses. Your financial advisor will always be happy to help you break the ice and create a comprehensive financial plan.