Do you wonder what the best debt reduction strategies are, to pay off your debt?
What are four strategies to lowering or eliminating your debt?
This past year was a tough one and many of us barely survived. We lost jobs, collected unemployment, and lost our businesses. Many celebrated the end of 2020 with an eagerness for a clean slate and fresh, new possibilities.
So, if you have big goals for 2021, then start first with your finances! Too much debt and out of control spending habits can really limit your opportunities in the new year.
Creating strong financial habits right now can empower you to pursue all you imagined – and so much more.
“Budgeting isn’t about limiting yourself – it’s about making the things that excite you possible” Unknown. So, what’s possible for you when you get rid of your debt?
In this post, I will cover four powerful debt reduction strategies that you can use to crush your debt in 2021. Each strategy uses a different approach to paying down debt.
You should choose your strategy based on the amount of debt you have, when you want it all paid off, and how you are best motivated.
For example, when paying down debt, I like to see progress immediately.
So, I like to use the snowball method, because if I can eliminate just one source of debt, such as a credit card, even if it only has a small amount on it, I feel like I accomplished something great!
The key to choosing your debt reduction strategy is to know what motivates you the most.
Paying down debt can be hard, and if you have a strategy that plays to your psychological strengths, you will see more progress than if you consider just financial aspects alone.
So, let’s get started with the four main debt reduction strategies!
Debt Reduction Strategy #1:
The Debt Snowball Method
As I said, the debt snowball method is my favorite way to pay down debt, so let’s start there first. I like it because it plays to what motivates me – seeing progress very quickly.
The idea behind the snowball strategy is that you start by tackling your lowest balance first.
So, if you have three credit cards, and Card One has a balance of $500, Card Two has a balance of $1,000 and Card Three has a balance of $3,000, you start by tackling Card One.
This means you pay the minimum monthly payments on Cards Two and Three while paying as much as you can – over your minimum – on Card One every month until that one is paid off.
Once you pay off Card One, you take whatever you were paying each month on Card One and apply it to Card Two, on top of the minimum payment you are already making to Card Two.
And just like a snowball that keeps picking up snow as it rolls down the hill, paying off your debt with this method will increase what you can put towards each balance, as you roll money from one debt over to the next.
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Here’s how the Debt Snowball Method works:
1. Make the minimum payments on all of your debt.
2. Pay more than the minimum on your debt with the lowest balance. Pay as much extra as you can every single month.
3. Once your smallest debt is paid off, take that same amount that you were paying towards it every month and add it to the minimum monthly payment you were making on your second smallest balance.
Using this method, you will pay off your debts in order from the smallest total balance to the largest.
Pros Of The Debt Snowball Method
The biggest pro, in my opinion, is psychological motivation. Paying off your smaller debts first can give you small successes in the beginning. If you have a large debt that seems daunting, conquering the smaller ones first keeps you motivated by building off of those smaller successes, moving you towards the larger, more daunting debt.
If you are facing an overwhelming number of accounts with debt, tackling the smallest ones first also helps you to eliminate more accounts quickly, motivating you to keep going as well.
This method allows you to see progress fast – crushing your debt sooner.
Why the debt snowball method is one of the best debt reduction strategies?
The debt snowball method has more going for it than just psychological motivation.
- This debt reduction strategy can help you pay down debt faster because you are reducing the number of accounts you owe on faster, by tackling the smallest first.
- This strategy could improve your credit scores more quickly since you are eliminating debt from your credit report.
Cons Of The Debt Snowball Method
When using the debt snowball method, you could end up paying more in interest over time.
This is because this method does not consider the interest charges on each account, only the balance. You could end up paying an account with a higher balance – and higher interest rates – last.
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Debt Reduction Strategy #2:
The Avalanche Technique
If you are motivated more by financial gains or saving money than you are by seeing progress as quickly as possible, then the Avalanche technique might be a better debt reduction strategy for you.
Keeping with the snow symbolism, the avalanche technique works much like an avalanche in the winter – you start out slow, but as you gain momentum, your entire pile of debt comes crashing down!
Rather than starting with the lowest balance, like in the snowball method, you start with the account that has the highest interest rate.
So, in our above example, Card One had a balance of $500, and an interest rate of 13.04%, Card Two had a balance of $1,000 and an interest rate of $17.87, and Card Three had a balance of $3,000 and an interest rate of 14.58%, you would start with Card Two, regardless of the balance.
Everything else stays the same as the snowball method – you continue to make minimum monthly payments on Cards One and Three while paying more than the minimum on Card Two. It’ll take you longer to pay off Card Two using this strategy because it has a higher balance, but it will save you more money in the end.
And once it is paid off, you take what you were paying towards Card Two and apply that on top of the minimum payment of Card Three because it has the next highest interest rate.
Here’s how the Avalanche Technique works:
- Make the minimum payment on all of your accounts.
- Put as much extra money as you can on the account with the highest interest rate.
- Once that account is paid off, take the money you were putting on that account and add it to your minimum payment on the account with the next highest interest rate.
Using this method, you will pay off your accounts with the highest interest rates first, saving you more money in the long run.
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The Pros Of The Debt Avalanche Technique
If you are motivated more by saving money than you are by seeing progress quickly, then the avalanche method might be for you. With this technique, it takes a while to see any progress, but once you do, it stacks up quickly, crushing your debt in as much furry as a rush of falling snow.
Why the avalanche method is one of the best debt reduction strategies?
- You save the most money over time since you pay off accounts with the highest interest rate first.
- Even though it starts out slower than the debt snowball method, the avalanche technique is still a fast way to pay down debt, because less interest accumulates over time.
While you are busy paying down your debt, your lenders are busy adding more debt to what you already owe, through the use of interest.
This is called ‘compounded interest’, and according to Investopedia, “compound interest (or compounding interest) is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. Thought to have originated in 17th century Italy, compound interest can be thought of as “interest on interest,” and will make a sum grow at a faster rate than simple interest, which is calculated only on the principal amount.”
Most credit cards compound interest daily, while other loans may compound interest monthly, semi-annually, or annually. So, it makes sense to pay off the cards with the highest interest rate first.
Cons Of the Avalanche Method
1. As we discussed, it can take longer to see any initial progress from the avalanche method. Therefore, if you are more motivated by seeing progress and small wins, you may want to consider the debt snowball method.
2. Using the avalanche method is a debt reduction strategy that requires discipline and commitment. If you struggle to see things through, this method might not be a good fit for you.
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Debt Reduction Strategy #3:
The Cash Flow Method
For some, this is a relatively new way of paying down debt. But for me, it’s old school. The cash flow method works well for those who are currently struggling to make ends meet. As a stay at home mom of six, that was me for a long time.
It can be hard to find the extra money to put on your credit cards and loans, but it doesn’t mean you have to give up on paying off your debt altogether. The cash flow method works for those who have very little extra income, are living paycheck to paycheck, and for those who are currently living in a financial crisis.
To use the cash flow method, forget about credit card and loan balances. Don’t worry about compounding interest. What you want to look at, when using the cash flow method, is your current monthly payment.
To use the cash flow method, focus first on your bad debt. There are two kinds of personal debt you can acquire – good, and bad.
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Know Your “Good Debt”
According to Investopedia, good debt is a debt you take on to increase your net worth. This might be business debt, a mortgage, or a student loan.
And bad debt is debt that you incur on items that depreciate over time. This is credit card debt, recreational and luxury items, and even vehicle payments.
To use the cash flow method, you want to focus on how much your bad debt is costing you every month. So, compare the minimum monthly payments you are making on pretty much everything except your mortgage, student loans, or small business if you have one.
Which bad debt payment is costing you the most every month?
In our above example with the credit cards, say Card One, with the $500 balance, had a minimum monthly payment of $21. Card Two had a minimum payment of $100 and Card Three had a minimum payment of $275. If you were to use the cash flow method, you would focus on paying off Card Three first, because it is costing you the most money every month.
If you can pay more than the minimum of $275, then do it. If not, then just pay the minimum, until that card is paid off.
When that card is paid off, you take as much of the $275 as you can and put it on the next largest monthly payment, which would be Card Two.
Because cash flow matters and you are living paycheck to paycheck, you might not be able to put the full $275 on Card Two. You may choose to put an extra $200 on Card Two every month and stash the remaining $75 into savings.
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Here’s how the Cash Flow Method works:
- Look at the minimum monthly payment of every credit card and loan (except for your mortgage, business loan, and student loan).
- Pay off the credit card or loan that has the highest monthly payment first.
- When that is paid off, pay off the credit card or loan that has the next highest payment.
Using this debt reduction strategy helps you to free up a little more money each month, giving you more money to pay off other bills, other debt or to put into savings.
Why the Cash Flow Technique Is One Of The Best Debt Reduction Strategies?
- If monthly cash flow is a struggle for you, this is the best technique to use to pay down debt because it tackles your biggest monthly payment first. Once that payment is gone, you have more money every month to put towards something else.
- Although it’s beneficial, this method doesn’t require you to put the entire monthly lump sum of your paid-off account onto the next account, as the snowball and avalanche technique do. If cash flow is an honest issue, you may be scrimping pennies and barely getting by.
Sometimes it makes sense to put a little bit of the previous payment amount towards the next largest monthly debt, and some into savings, or some into a bigger grocery budget.
The focus is on lessening your monthly load and stretching your dollars, as well as paying down debt.
Cons Of The Cash Flow Technique
- The cash flow technique may not work as quickly for overall debt reduction. This is because you do not focus on the highest account balance but on the biggest monthly payment.
- This technique may not save you money in the long run, since you do not focus on interest rates or high credit balances.
- It might be hard to stick to this technique if your biggest monthly payment is also your account with the highest balance because it takes longer to pay that off. If you are a person who is motivated by immediate wins and small successes, this strategy may be hard for you to stick to.
Debt Reduction Strategy #4:
The Equal Distribution Method
I think this is the method we all start out using, from the moment we start accruing debt. And it makes sense. We’ve been told forever to ‘pay more than the minimum’. And the equal distribution method does just that.
If you have more than one debt, and you have an extra hundred bucks, the equal distribution method dictates that you pay a little bit extra on each debt.
So, in our above example with the three credit cards, you would simply put $33 on each card, regardless of the minimum monthly payment, the credit card balance, or the interest.
It’s a very simple way to pay down debt.
Here’s how the equal distribution method works:
- Start by making the minimum payment on every debt you have.
- If you can afford to, pay more than the minimum payment on each debt evenly, across the board.
- Any time you have extra money, distribute it equally to each of your debts as well.
Why the Equal Distribution Technique Is One of the Best Debt Reduction Strategies?
- Using this strategy could improve your credit score because you are consistently making more than the minimum payment on each of your accounts.
- This might be a good technique for someone who is motivated by small wins because each account balance will slowly drop.
Cons of Using The Equal Distribution Technique
- Progress is slower. There is no quick win through paying off one account in its entirety since payment is equally distributed among all accounts.
- You may pay more in interest over time since you are not tackling the account with the highest interest. This will cost you more in the long run.
- It might be hard to stay motivated. Even though each account balance is slowly dropping, the amount it is dropping by is so small. This may be discouraging, because you may feel like you are working so hard – for nothing.
What is the Best Strategy For Paying Off Debt?
There is no good way to answer that question. There are many ways to both manage your debt and to pay it off; more than the four listed here. I believe, however, these four are the best.
And out of these four, what is the best debt reduction strategy for you to use? The jury’s out.
You need to carefully evaluate the pros and cons of each. And you need to know what motivates you.
- Is it money? If so, then the avalanche technique might be your best bet, because you can save the most money using it.
- Is it small wins? Seeing quick success? Then try the snowball method.
If cash flow is an issue for you, you may want to focus on the debt with the biggest monthly payment first.
I personally like to combine the snowball method with the cash flow method. Why not?
We paid off the credit card with the largest minimum monthly payment first, freeing up the most money in our budget.
And then, because times were tough, I put a little bit of that extra money, from no longer having that credit card payment, towards our grocery budget (six boys – they eat a lot!). And the rest I tossed on top of the next largest minimum credit card payment.
It worked for us. But that is because we are motivated by small wins – and liked having the extra money in our monthly budget.
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More Financial Tips To Crush Your Debt Even Faster
Great, you say. These four debt reduction strategies may all be fine and dandy, but how in the world do you come up with the extra money to start paying them off?
It isn’t easy, especially if you already struggle to make ends meet. But, where there is a will, there is definitely a way.
My best advice is to hold what motivates you near and dear to your heart. Too much debt, coupled with unhealthy financial habits, can really limit your opportunities. Not kidding.
You have a big goal for 2021 – if you didn’t, you wouldn’t be here, devouring everything you can find on It’s All You, Boo.
But, to meet your goals, you will need to invest.
You might need to free up more time, by outsourcing some of your current responsibilities. Or you could need further education, instruction, or coaching. It’s even possible you need to invest in new or updated equipment.
Debt can hold you down and keep you prisoner. As long as you are balancing multiple debts, you will find it hard to come up with the extra money to invest in yourself and your goals.
When the opportunity comes a-knocking, you will be forced to close the door and say, “come back later”.
That’s not what you want! You want to be ready to grab whatever possibilities 2021 can throw at you! So, keep your goal near and dear to your heart. Let it be the driving force to your debt reduction plan.
And try some of these tips as well, for crushing your debt even faster.
#1. Cut unnecessary expenses and put those savings towards debt
The best way to do this is to track your expenses for a month first. Literally, write down everything you spent money on during the day. You can keep a notebook by your bedside, and record your expenses right before you retire, or on your desk, where you can write them down right away in the morning, with a cup of coffee.
After a month, you should have a good idea of where you spend your money – and what you can cut out. It might be that cup of coffee every day or eating out for lunch at work.
Whatever it is, cut it out! And use that money to put towards one of your debts. You want your new goal more than you want that cup of coffee!!
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#2. Use your savings to pay off larger debts
This is a good strategy if you can tolerate a certain amount of risk. It is advised that we all have three to six months of our salary set aside in emergency savings. It’s probably best not to touch that.
But if you have any excess savings, you can use that to pay down your debts.
And if you are somewhat of a risk-taker and would rather pay off debt and worry about tomorrow when tomorrow happens, then you could consider taking out even more of your savings.
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#3. Ask for a lower interest rate
This is a great technique for paying down credit card debt. Most credit card companies are happy to work with you to get your debt paid in full.
If you have struggled to make your credit card payments, these companies are usually willing to work with you on a better repayment plan, including lowering your interest.
All you have to do is pick up the phone and ask.
#4. Use your tax refund
Yes, yes, and yes!! If you get a tax refund, use it to pay off your debt. Don’t blow it on a vacation or something that doesn’t matter.
#5. Sell unused items and put that money towards debt
Most of us have way more in our possession than we could ever need. Walk around your house and yard. Take inventory. What do you no longer use? What could you part with?
Sell these items! Use online Facebook groups, sell and swaps, or hold an old-fashioned garage sale. Get rid of them and put the proceeds towards your debt.
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#6. Find ways to bring in extra income, such as a side hustle or moonlighting
There are so many different ways you can bring in extra money. Some of the most common include getting a second job, providing a service, or starting an online business.
No matter your situation, there are endless ways to make money on the side!
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#7. Use unexpected windfalls
A ‘windfall’ is any unexpected money that just ‘fell’ into your lap. This can come in the form of gifts, reimbursements, or even stimulus payments.
What did you do with your last stimulus check? My husband and I paid off our last bad debt. We have no credit card payments, no vehicle payments, and no personal loans.
If a family of eight on one income can do it, then so can you!
#8. Debt consolidation
If you have more debt than you can handle, you might need to look at consolidating it. This means combining it into one easy payment.
There’s a couple of ways you can do this:
- Roll it all onto a low-interest credit card
- Take out a personal loan
- Work with a debt consolidation company
I don’t recommend debt consolidation, however, unless you absolutely cannot afford to make your monthly minimums. Using debt consolidation doesn’t reduce your debt, and it doesn’t change your spending habits.
#9. Create a budget
I know, I know, you just groaned. But budgeting has gotten such a bad rap! It isn’t bad once you get used to it, promise!
The key is to create a budget that really will work for you, not one that is so strict that you feel deprived and give up almost immediately. Check out my post on how to create a budget as a stay a home mom.
A workable budget will help you to stay motivated and on track to achieving your financial goals.
And meeting your financial goals empowers you to chase after your dreams.
#10. Stop borrowing
Simple advice, but hard to do.
The best way to stop borrowing is to go cold turkey. Cut up those credit cards and blacken out all of the credit card numbers you have on file somewhere.
Don’t use them.
Learning to live within your means will help you to stop accumulating new debt and it will keep you debt-free once you finally pay off all of your debt.
Get Motivated to Reduce Your Debt
There are many different debt reduction strategies you can consider. The key is to figure out what motivates you and to choose a strategy that plays to your strengths.
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The best debt reduction strategies to consider are:
- The debt snowball method, because you pay off the smallest balance first, resulting in a quick win and the motivation to move on to the next smallest balance.
- The avalanche technique, because you focus on the account with the highest interest, saving you the most money in the long run.
- The cash flow method, because you focus on the account with the highest minimum monthly payment, freeing up more money in your monthly budget once it’s paid off.
- The equal distribution method, because you pay more than the minimums on every one of your debts equally.
Out of these four debt reduction strategies, which will you try and why?
Tell us in the comments below!
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Which of these 4 debt reduction strategies will you use?
More About Guest Contributor
Shannon is a freelance writer and blogger from Northern Minnesota. She creates educational content that helps moms to live and love passionately while pursuing the best of life at Making Mommas. You can find her published work on sights such as Minnesota Parent, Today’s Parent, and the Washington Post. When she’s not working, Shannon’s hanging out with her boys, and husband of almost 25 years.