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12 Months to Debt Freedom – Best Debt Repayment Strategies

April 7, 2016
5 mins
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When it comes to getting out of debt quickly, it's important to have a strategy. Since paying off debt is as much a psychological journey as it is a financial one, some people are able to stay motivated when they follow certain debt repayment strategies but not when they follow others. Some people know immediately which strategy will work best for them while others need to do a little bit of trial and error before figuring out what works for them. Here are just five debt repayment strategies that you might consider trying out during your 12-month journey to debt freedom.

The Debt Snowball Method

The debt snowball method is one of the most popular ways to pay off debt. Basically, you put any additional money towards the credit account that has the smallest balance. The reason for this is that if you focus on the smallest account first, you're going to pay it off quickly. Once you completely pay off that credit card or loan, you'll feel a sense of accomplishment. Once you pay off the lowest account balance, you can then focus on the next account with the lowest balance and score another quick win. Since you'll have more money to put towards the second account each month because you've already paid off the first account, the wins will likely become easier and faster. It's called the debt snowball method because it's like a snowball rolling downhill. As it gets further down the hill, the snowball gets bigger and bigger until it's enormous and can mow down anything in its path. Some people feel like this method of easy and early wins is best because they find that they feel such a powerful sense of accomplishment when they pay off an account and that this is psychologically more effective at getting them to stick to the process of paying down their debt. In a way, the debt snowball method hacks into the pleasure and reward systems in our brains and hardwires it in order to make us debt repayment machines.

The Debt Avalanche Method

This method is also sometimes referred to as the debt stacking method and suggests that you should focus any additional cash on the credit card or loan that has the highest interest rate. Since you'll be paying more each month in interest on this account, by paying off this debt first, you save more money overall, pay less interest, and pay off all your debt faster than with the debt snowball method. For this reason, the debt avalanche method is more rational and effective than the debt snowball method. The problem with this method is that the account with the highest interest rate might be an account with the most owing. That means that it will take much longer to pay off your first account than it would with the debt snowball method. For this reason, some people find that it can take too long to feel the sense of accomplishment that comes from closing an account which leads them to feel overwhelmed and less likely to stick to their debt repayment plan.

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The Equal Repayment Method

Some people find that the first two methods are too complicated and decide just to divide whatever extra money they have to put towards their debt each month between their accounts. This method is the simplest since you don’t have to sit down and figure out which account charges the highest interest rate or which account is the smallest. Instead, you just top up all of your monthly payments. This method works well for people who are overwhelmed with the debt repayment process and want to simplify it as much as possible.

The Consolidation Method

If you have good credit and a well-paying job and all your debt is on high-interest credit cards or loans, then you should consider the consolidation method. A consolidation loan is a relatively low-interest loan you can use to pay off all your existing debt. You will then have just one loan to repay. This simplifies your debt repayment and saves you a considerable amount of money in interest charges. Because of this, it accelerates your debt repayment. A common way for homeowners to consolidate their loans is to get a home equity line of credit (HELOC) or second mortgage. Because debt that is tied to your home is secured debt, you will likely get the lowest interest rate that way. The problem is that your debt is then tied to your home and if you don’t pay it you could lose your home. If you don’t own a home, you should consider a line of credit or a loan from your bank or a reputable online lender.

The Borrow-From-Yourself Method

Another option to paying back your debt is to borrow the money from yourself. If you have an emergency fund or a TFSA, then you might consider using some of all of this money to repay your loans. If you’re being charged a high-interest rate on your debt, then it makes sense to liquidate any investments you might have in your TFSA to pay that debt back quickly since you likely won’t be making more interest on those investments as you’re paying in interest charges each month. Liquidating your emergency fund to pay back debt isn’t something that everyone feels comfortable with but as soon as your debt is gone you can start saving again for your emergency fund.

Which Should You Use?

There are a number of different strategies for repaying your debt and they are not mutually exclusive. For example, you might pay off some debt by borrowing from yourself and then start using the debt avalanche method. What’s important is that you choose a strategy that’s right for you and that will keep you motivated.

Amanda Reaume

Amanda is a freelance writer and the creator of the blog Millennial Personal Finance. After graduating from university with no debt, and $40,000 in savings, Amanda wrote the book The Complete Guide to a Debt-Free Education. She is also the author of a personal finance book aimed at Millennials called Money Is Everything.

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