Spend less than you earn. It sounds like a simple directive, but for millions of Americans debt is a harsh reality, sometimes piling up to the point where it feels insurmountable. Getting out of debt isn’t just a mathematical problem; it’s a psychological one as well. So while one strategy may be financially optimal, the best one for you is the one you can stick to over the long term.
Take stock of your debt
Before you formulate a plan, it’s time to step back and look at the main factors you can control as you pay off your debts. First, if you find yourself in a hole, take the age-old advice and stop digging. Whether you establish a basic budget or decide to wing it, you’ll need to find some source of money to pay off your debts. It’s time to create a plan of attack. Here are approaches to consider.
- Snowflake Strategy. The snowflake method works by finding lots of little savings that you can put toward one giant goal. Any cash you find that doesn’t have a specific purpose in your budget goes straight into your debt repayment fund. The snowflake strategy doesn’t require much effort to start, but it does require a lot of willpower over time to keep going.
- Avalanche Method. To use this method, you’ll need to find out the interest rate you pay on each of your debt accounts. Make the minimum payment on all your accounts first, and then with any additional money to pay off the account with the highest interest rate. Once you pay off the balance on the account with the highest rate, you simply move to the account with the next-highest rate.
- Snowball Strategy. To use the snowball strategy, you go back to your list of accounts and rank them based on each account’s balance. Then you’ll pay them off in order from lowest to the highest. If you have higher balances on accounts with high interest rates, this approach will definitely cost more money over time than the avalanche method. Because you start with the lowest balance, however, you will pay off the first account sooner. That feeling of satisfaction gives you the psychological momentum, making it easier to stick with the strategy over the long term.
At their roots, the snowball and avalanche strategies play to opposite poles of the human brain. The avalanche appeals to logic, while the snowball appeals more to emotion. You may find yourself somewhere between poles. In that case, you might try to start your debt reduction with an account that combines a relatively high rate with a relatively low balance, giving you the emotional boost of reaching your first milestone quickly.
Like the best diet or exercise plan, in the end, the best debt-reduction strategy is the one you can stick with until you reach your goals. It may take some experimentation to see what type of success gives you enough momentum to reach the next landmark on your path to repayments.