Four Debt Payment Strategies Every Person Should Know

Posted by Fitz Villafuerte under Personal Finance on June 13, 2012

Do you have huge credit card debts? What are you doing to get rid of it?

Most people just pay whatever they can afford every month, with some only paying the minimum amount due on their credit cards.

If this is simply what you’re doing, then your payment strategy is “weak” and could use an upgrade.

Below are four debt payment strategies that can help you eliminate debts faster, while incurring less interest fees.

But first, here are three things YOU MUST DO BEFORE everything else:

1. Commit to the goal.
A debt payment plan is usually a long, uphill battle and only those with enough focus, patience and determination can succeed. Prepare your mind because this will not be an easy task.

2. Stop incurring more debts.
Make sure you don’t add any more debt to what you already owe. Take out your credit cards from your wallet and give them to your parents or someone you trust for safekeeping. (You can cut your credit cards to half also if you want.)

3. List all your debts.
Write down all the money you owe – from credit card debts and personal loans, up until the money you owe to friends. Then make a simple spreadsheet that lists down those information, including interest rates and minimum monthly payment required for each; just like below:

After this, you’re now ready to tackle your debts…

Four Strategies That Will Freeze Out Your Debts

Strategy 1: DEBT SNOWBALL METHOD
This strategy requires you to order and pay your debts by size from smallest to the largest.

You throw as much money as possible to the first debt while paying the minimum on the rest. When the target debt is gone, you apply the same to the next one on the list, and so on until they’re all paid.

Doing this gives you quick wins because the smaller debts gets paid first and that will keep you motivated to continue with your goal.

Please note that in the example above, card C gets paid first before card B because it has a higher interest rate.

Strategy 2: DEBT AVALANCHE METHOD
This strategy is similar to the debt snowball method, but instead requires you to order and pay your debts by interest rates from highest to lowest.

Similarly, you throw as much money as possible to the first debt while paying the minimum on the rest. And do so cumulatively until all debts are paid.

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This method is mathematically better because you will pay less interest rates and can get out of debt quicker.

Please note that in the example above, card B gets paid first before card A because it has a higher balance.

Strategy 3: DEBT SNOWFLAKE METHOD
This strategy is a supplement to the first two above. This method requires you to look for ways to minimize your expenses, and funneling all the money saved into paying debts.

For example, your boss treats everyone in the office for lunch, so you were able to save some money on meals. Instead of spending that “extra cash”, put that supposed “lunch money” towards your debt.

That amount may be small (a snowflake), but it is nevertheless important and valuable.

Strategy 4: DEBT SNOW SHOVEL METHOD
This is another strategy which supplements the first two methods and it is the best solution if you can’t even pay the minimum requirements.

Simply stated, this strategy requires you to find extra income, and funneling all the earnings towards your debt payments.

Sell some stuff, get into freelance work, find a second job, discover zero or low-cost income opportunities – then shovel all the extra cash flow into paying your debts.

It’s hard work, much like shoveling snow; but with patience and perseverance, it can be done.

debt-snowball-method

Getting rid of debt quickly and efficiently requires a plan, and the four strategies above are your best tools to achieve just that.

The last two methods are pretty self-explanatory, but if you want a more detailed explanation of how the first two methods work, you can check out this post:

Read: How To Get Out Of Debt With The Snowball Method

That article contains a more lengthy example of the strategy, and also mentions the Debt Avalanche Method towards the end.

But wait there’s more…

Before I end this post, I’d like to give you a few more tips:

  • The best method is always a combination of all four. Each person’s situation is different and it’s encouraged that you design your own debt payment strategy based on the basic concepts above.
  • Revisit your strategy every month. Be diligent about adjusting it to fit your situation. Each month always brings new financial challenges, so be sure you’re prepared for it.
  • After you’ve planned out your strategy, call your creditors to negotiate for lower rates. Since you already have a clear view of your financial standing, you can easily know if a debt payoff plan they might offer is doable for you.
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5 Responses to “Four Debt Payment Strategies Every Person Should Know”


  1. pezahub says:

    Nice article Sir Fitz. Do you have any suggestive self-help books that really made an impact on your life?

    Thanks

  2. Lance says:

    i just emailed this to my friend! Good stuff!

  3. RONA says:

    Thank you Sir Fitz for all the helpful tips.
    I am using snowball method since this April, really hoping to be debt free soon.

    Again, thank you.

  4. […] of the finance blog I read has one generic advice: free yourself from debts before or while you start building up your savings and start building your emergency fund first […]

  5. […] Read: Four Debt Payment Strategies Every Person Should Know […]

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