Chefette&Little Are you interested in paying off your debt once and for all but feeling overwhelmed…this blog post is for you!!
This is for informational purposes only. For financial or legal advice, consult a professional. View the DISCLAIMER for more information.
What is Debt??
According to Ramsey Solutions 77% of American households have at least some type of debt, and the average American debt is $66,772. In 2023 the total personal debt in the U.S. was $17.5 trillion, and the average debt per individual, excluding mortgages, was $21,800. Debt is owing any money to anybody for any reason. Typically if one has debt, you’ve agreed to terms of repayment which likely include specific set payment amounts at a set time period until the debt is paid back in full plus any interest-which is essentially the fee or cost that the lender charges you for lending you the money. Most common types of debt that Americans include credit cards, auto loans, student loans, and mortgages.
If anything, these numbers should tell you that if you have debt currently you are NOT alone. Getting out of debt is possible and achievable, before we broach the topic of best avenues to debt reduction I want to discuss WHY getting out of debt should be a priority.
Why Should You Get Out of Debt?
One word: compounding interest, okay I guess that’s two word, one concept. Compounding interest can either be your best friend (if you’re investing in the stock market), or your worst enemy i.e. when out of your monthly minimum payment on that credit card 85% of your payment is going to interest so your overall balance is not really changing, despite you regularly sending your lender your hard earned cash. It is SUPER frustrating to be making what feels like a whopping payment, and let’s be honest you worked hard for that income, but not seeing your overall balance owed change much at all! This is due to interest (and capitalism and predatory lending practices but that’s for another time). As we mentioned earlier interest is the fee that the lender charges you essentially for being willing to have lent you the money at the time you needed it. It can feel as if you’re running in place on a hamster wheel as you’re sending in regular payments but not seeing your debt balance decrease. I get it, it’s incredibly frustrating!
Before we move on to establishing your “why” I want to emphasize the importance of not letting shame creep in. There are likely a million reasons why you have ended up in credit card debt, you may have gone on a vacation that you truly enjoyed but couldn’t actually afford at the time so now find yourself owing that money, you could have had a medical emergency that you couldn’t afford but had to be paid for at that specific time, or maybe you were truly not making enough to meet your basic needs. Whatever the reason I want you to hold space for yourself, feel free to grieve, vent, cry, but please don’t beat yourself up and I also want you to avoid “throwing in the towel” and saying to heck with it, I want you to care and want to pay off your debt and if you need to be angry at someone be pissed at predatory lending practices not yourself!!
Establishing Your Why
I think this step is super important because there will be ebbs and flows in your debt payoff journey and returning to your “why” is what will keep you going on some really frustrating days. I want you to imagine what your life would look like if you no longer had debt. What would you be able to achieve if you weren’t sending that money each month to lenders but instead could spend it on what YOU want. There can be layers to your why as well. Maybe you would like to fully fund your retirement or perhaps want to be able to save for your kids’ education/future. Maybe you want to feel more in control and be able to save for life’s big adventures-a house, annual vacations, have money saved and set aside so the next time a medical emergency comes up you don’t have the added stress of wondering how you’ll pay for it. Maybe you want to build generational wealth. Whatever YOUR why is I want you to write it down and keep it somewhere safe so that you can regularly check in on it when life throws you curves and you need some extra motivation to ride out the bumps along the way!
What to Do If You’re in Debt
There are three main methods for debt repayment: the snowball method, the avalanche method, and the debt priority method. We will discuss how each method works, look at the pros and cons of each and then discuss the steps you need to take to get started on your debt payoff journey!
Snowball Method
This method focuses on the total debt size by tackling the smallest debt balance first. To get started you will list out ALL of your debts, this step can be scary and overwhelming but you CAN do this, this is the first step towards no longer having this stress in your life, don’t give up! You will make your regular minimum payments on all of your debts, on-time except for your smallest debt. Instead you will throw as much as you possibly can at your smallest debt until it’s paid while continuing to make the minimum payments on the rest. You will continue to do this until your smallest debt is paid off, then you will move on to the next smallest debt, pay the minimum plus whatever you were paying towards the debt you’ve just paid off, while continuing to make your minimum payments on all the rest. By focusing on one debt at a time you will make steady progress and build momentum much like a snowball does as it rolls downhill, hence the name! You will keep repeating this cycle until all of your debts are paid off. Pros of this method: helps build momentum as it is satisfying to see zero balances, cons of this method: you will likely pay more overall as you aren’t factoring in interest rates, so you may end up paying off your lower interest debts first.
Avalanche Method
This method focuses on the interest of your debt by tackling the debt with the highest interest rate first. To get started you will list out ALL of your debts just like with the snowball method except you will also include the interest rates for each debt. You will make your regular minimum payments on all of your debts except for the debt with the highest interest rate. Instead you will throw as much as you possibly can at the highest interest debt until it is paid off, while continuing to make all of your minimum payments on the rest. You will then move on to the debt with the next highest interest, you will pay your minimum payment plus whatever you were paying towards the highest interest debt that is now paid off while continuing to make all of your minimum payments on the rest, you will keep repeating this cycle until all of your debt has been paid off. Pros of this method: you will end up paying less money overall than any other method as you will be paying off your highest interest debts first, cons of this method: it can be slow to start seeing significant progress which can be really discouraging.
Debt Priority Method
This method focuses on paying off your highest priority debt first. You will start the same as the other two methods by listing out ALL of your debts. You will then decide which debt you want to pay off first. Perhaps you owe money to a family member and it feels terrible to owe a loved one money that may be what you choose to pay off first regardless of debt amount or interest rate. You will make all of your regular minimum payments on all of your debts except for the debt with that you have decided is the highest priority to pay off first. Instead you will throw as much as you possibly can at the highest priority debt until it is paid off, while continuing to make all of your minimum payments on the rest. You will then move on to the debt that you have decided you next want to pay off, you will pay your minimum payment plus whatever you were paying towards the first priority debt that is now paid off while continuing to make all of your minimum payments on the rest, you will keep repeating this cycle until all of your debt has been paid off. Pros of this method: it can be super satisfying to pay off the debt that is the highest priority to you, it can be super motivating and satisfying to pay off the debt that has been bothering you the most, cons of this method: it may not be the fastest method when compared to the snowball method, and you may pay overall more in interest than the avalanche method.
You Can Do This!
As Tori from Her First 100K likes to say “personal finance is personal,” only you can answer which debt payoff method will work best for you, and you may end up switching to a different method after getting started, this is more than OKAY!! While we’ve covered that having debt is certainly common, it is worth it to pay it off. Debt holds you back from living your dreams both today and in the future, so it is well worth it to come up with a plan to tackle it once and for all. Don’t forget to return to your why if you need extra motivation to get started. You may be wondering what to do about saving either before you start your debt payoff journey and/or while you’re on said journey. I’m going to be tackling this in a future blog post, so stay tuned for that!! Let me know in the comments below which method you are going to start with and if you want to share your why feel free to do so!!
