Effective Debt Repayment Strategies

Debt is overwhelming. Period. It’s insane how easy it is to find ourselves in debt, but how difficult it feels to get out of it. With intentionality and planning, it is possible to be debt-free.

A debt repayment plan should be simple and straightforward. Below I explain two simple methods for paying down debt that have worked for us and many others.

Debt Snowball Method

The debt snowball strategy for paying off debt involves systematically paying off debt in order of smallest to largest balance. The concept behind this method is that the borrower achieves psychological and emotional wins which helps them to maintain momentum in paying off debt. The quick wins in paying off the smaller debts first provide positive reinforcement and a sense of accomplishment resulting in continued motivation.

How it works:

1. List all debts in order from smallest to largest.

2. Make minimum payments on all debts.

3. Allocate all extra funds or available resources towards the smallest debt. 

4. Once the smallest debt is paid off, take everything you were putting towards the smallest debt, and apply that amount, in addition to the minimum payment you were already making, to the next smallest debt (this is the snowball effect).

5. Repeat this process until you have all debts paid off.

Debt Avalanche Method

The debt avalanche strategy for paying off debt is similar to the debt snowball, however, instead of paying off debt in smallest to largest balance order, debt is paid off in order of highest interest rate to lowest interest rate. The benefits to this strategy are that the borrower eliminates the debts that are costing the most in interest first, which results in it (sometimes) being more cost effective than the debt snowball. The downfall to this method is that it does not achieve the same quick psychological wins as the snowball method, and maintaining motivation may be more difficult. 

How it works:

1. List all debts in order from highest interest rate to lowest interest rate.

2. Make minimum payments on all debts.

3. Allocate all extra funds or available resources towards the highest interest rate debt.

4. Once the highest interest rate debt is paid off, take everything you were putting towards the first debt, and apply that amount, in addition to the minimum payment you were already making, to the next debt.

5. Repeat this process until you have all debts paid off.

In order to be effective in debt repayment, you need to first stop spending money that you don’t have and second, have money to apply toward the debt. Finding the money to apply toward your debt can be done in one of two ways, make more income, or spend less of your money.

To learn the proper order for budgeting and how to find more money in your budget, download our free Simple Starter Budget tool. Once you list your budget in proper order (wants last), you can start taking items off from the bottom up to apply toward your debt.