Now that you’ve done the first five steps to improve your financial situation, you may be wondering, what’s next?
You have this gorgeous spreadsheet, and you’re ready to begin paying down (no! paying off!) your debt.
Here are five different debt payoff strategies, spelled out in plain English, that will help you decide the right plan for you.
Remember, these are simply options. Try one for a while, and if it doesn’t work, go ahead and try another. Or, combine two different strategies! Make a plan that will work for you.
The Logical Method
How it Works: List all your debts, along with their interest rates. Pay the minimums on each one, except the one with the highest interest. Pay more than the minimum on the highest interest loan. Repeat once you've paid off the debt with the highest interest, then move on to the next highest interest, and repeat until you're finished. Luke Landes of Consumerism Commentary also calls this the "Debt Avalanche."
Pros: If the logical method is followed as written, it is the fastest way to get out of debt. Paying off the highest interest rate will absolutely save you more money, and it makes the most sense, empirically speaking.
Cons: This method is very difficult to follow without some fatigue, and results are not often seen quickly. Pure math didn't get you into debt, and it's certainly not going to help get you out. Let's say you can only pay $100 after you've paid the minimums on all your loans. Now, let's say your highest interest loan is a credit card with 12% interest. But let's also say that the credit card's balance is $12,000. Adding an extra $100 a month will not make a remarkable difference in the way you feel. It's easy to give up when you feel like you're barely treading water.
Best for: People who inherited debt.
Not recommended for: Just about everyone else!
Image via DuBoi