Wednesday, February 5, 2014

Fastest Way to Pay Debt Off

The fastest and best way to pay off debt in my opinion is utilizing a method of paying on one debt as you pay minimums on the rest. The key is to continue to use the same amount or more money towards debt each month, while at the same time not adding to your debt. This is often called the Debt Snowball Method.

The best way to start is to list debts, balance owed smallest to largest. In the example below, there are four debts listed with the amount owed and the minimum payment. The plan involves making minimum payments on all debts except the one with the lowest balance.
  1. Medical, $1000, minimum $75
  2. Credit Card, $2250, minimum $90
  3. Auto Loan, $6000, minimum $210
  4. Student Loan, $8000, minimum $125
The total amount of debt in this scenario is  $17,250 in this example. Overwhelming, huh? Now if you didn't pay any extra on this debt it would take 35 months to pay this off. IF you weren't being charged interest. And IF you didn't add any more debt. This isn't a bad plan to get rid of debt if you can stay on the plan. It will get paid off, it will just take time. (Yes, I did ignore interest in these examples for the sake of simplicity.)

If I were starting with these debts listed, my first goal would be to pay off the medical debt. It is the smallest debt and I can knock it off pretty quickly. And even quicker if I were to add more money each month. Let's assume I can add an additional $200 per month towards the payment of debt. Here's what the pay off schedule would look like:

That payoff schedule eliminates the debt in 25 months! Ten entire months faster than if I didn't add the extra money. Once all the debt is eliminated I have the original $500 I was paying on debt and that extra $200 that can be put back in my budget. That will feel nice to have $700 to plan with.

Do you want to see another scenario? Maybe one where you can send in another $300, or $500 over the $500 you are sending in, for a total of $1,000 per month. It gets exciting!

Using this method of snowballing and adding double the normal payments, this debt of over $17,000 is eliminated in 18 months! And see that last month? The payment is only $250. Again once that debt is off your plate, you now have $1000 in your budget to work with.

What would you do with out debt? Save more for retirement, save for a down payment or college? Pay for something in cash? Any debt snowball questions?

 If you wonder where to find extra money, check out my blog at Saving Advice where I write a lot about snowflakes...small amounts of money that I find to apply towards paying down our mortgage debt.

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