The Best Way to Pay Off Debt

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Aldo Rancier
Aldo Rancier is the founder of MillionDollarNinja where he writes about getting out of debt, staying out of debt, and how to build wealth to reach financial independence.
Aldo Rancier
Aldo Rancier

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Aldo Rancier
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best way to pay off debt

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Getting into debt is very easy.  Just start buying stuff with your credit card and don’t pay it off each month.  But getting out of debt is very difficult.

The average American family with at least one credit card has around $16,000 in credit card debt (2012 data).  Many of these families are trying to erase that debt but are having a hard time accomplishing that.  There might be many different reasons why this is so, but one of those reasons might be that they’re not approaching it the right way.

When people start their debt payment process they usually try the most common way – paying off the card with the highest interest first, regardless of how much they owe.  And this makes total sense.  It is definitely the mathematical way to go.

If you pay the highest interest first, you end up paying less money in the end. That to me is a no-brainer.  But unfortunately that is not the best way to pay off debt.

The Snowball Method

With the snowball method, you align your cards from lowest to highest balance, regardless of interest rate.  You then pay the minimum on all cards, but add any extra money that you have to the lowest balance until you pay it off.  You then take the money you were using to pay off the first card and you add it to the second card while continuing to make minimum payments on the rest of your cards, and

so on.  You are in turn creating a snowball effect, where you start small and build up as it rolls downhill.

I can already hear all the mathematicians saying, “That just doesn’t make sense mathematically!  You’re going to end up paying more in interest!”  Which is true, but paying off debt is not just about math.  It is also about emotions.

By paying off the smallest balances, you create little victories.  Those victories will boost your morale and motivate you to keep on tackling your debt.  And that’s not just me saying it.

Researchers at the Northwestern University Kellogg School of Management have found that people who use the snowball method are more likely to pay off their debt.

How much more likely?  A person using the snowball strategy for 12 months was 14% more likely to pay off all debt.  After four years on the snowball method that same person was 43% more likely to be debt free.

That’s a big number.

The best way to pay off debt

I know the rational way to pay off debt would be to pay the highest interest first. I’m not crazy, I know that… okay maybe a little crazy, but I still know that paying less interest makes more sense.  However, I tried going the rational way and failed many times.  Once I tried the snowball method, I was out of debt in less than a year.

Emotions probably got us into debt and emotions make us cry when we see our bills (just me?) so now let’s use our emotions to get out of debt.  Once we have accomplished that, then we can kick emotions out the window.

I know first hand that the snowball method works and that’s why I say that it is the best way to pay off debt.

Have you used the snowball method?  What do you think is the best way to pay off debt?