If you want know how to pay off debt the fastest way possible, you are in the right place!
Do you feel like it is impossible to ever see your debt go away? You may even feel like it is not really worth it to try to even pay it down more quickly. Here’s why you want to pay of your debt as quickly as possible.
Why You Need to Pay Off Your Debt as Quickly as Possible
In my previous posts, we talked about how to quickly pay off your mortgage and your auto loans. Here, we talk about how to pay off your credit card debt and student loan debt as quickly as possible. Why is this so important?
- Credit cards have the highest interest rates, so it is SO IMPORTANT to pay off this debt as quickly as possible to reduce paying outrageous amounts in finance charges.
- Student loans can be some of the LARGEST DEBT you accumulate, so the longer you carry these debts, the more you are paying in finance charges.
- The thousands you save on finance charges can appropriately go toward accomplishing your bigger financial goals.
Before diving into your debt and facing, full-on, where you stand at this moment, making your financial goals FIRST is super important to avoid burnout during the debt payoff stage of your financial journey. So, if you haven’t already, I highly suggest listing your financial goals first. We covered personal financial goals you must make for yourself in your lifetime here, for your marriage here, and for your children here. After listing your lifetime goals, we can determine which of those goals we can accomplish this year. We also covered how to maximize your income here. And, we covered how to begin to set up a budget here. If you haven’t downloaded your free budget template yet, you can do so here now and create a budget for this entire year!
How to Enter Your Debts into My Debt Calculator
Today, you will also download my debt payoff calculator here so we can play with some numbers and figure out how to quickly pay off your debt the fastest way possible!
In the video above, I am showing you three different payoff comparisons, and the difference in finance charges and pay off dates is pretty amazing. Whether or not you are familiar with some of these methods, you will want to keep reading because there is one key thing that is missing from the apps and debt payoff programs out there. All the instructions for how to use this debt payoff calculator for yourself are included in my freebie library here.
That actually completes day seventeen of our budgeting challenge! I wanted to give you ample time to enter all your debts into my debt calculator. Tomorrow is when we compare payoff methods to find the best one for you! Day eighteen continues below.
Which Debt Payoff Method is Best for You
So, the total of the debt below is just over $15,000.00. I will be showing you comparisons between paying just the minimums on this debt, paying via the snowball method, paying via the avalanche method, and paying according to the method that maximizes your budget.
To put things in perspective, I have limited this calculator to six years (for this comparison), and you will see why this is important in just a second. Now, focusing on just paying the minimums on all four debts, the Citibank debt will be paid off by December of 2024. The Capital One debt will be paid by November of 2025. However, the Chase and Wells Fargo debts will NEVER be paid! As you can see, the minimum payments are not enough to cover the accumulating finance charges.
By year six of carrying this debt and only paying the minimum payments due, the finance charges accumulated have grown to $7,115.51 on the Chase card and $10,415.97 on the Wells Fargo card. Clearly, it is vital to understand your finance charges and how they affect how quickly your debt can be paid, or, in this case, never paid off. In six years of only paying the minimums on all four debts, the total finance charges will have accumulated to a total of $21,309.83, And, just for kicks, by year 2040, the total finance charges will have accumulate to $320,365.84.
The Snowball Method
Now, let’s evaluate paying this debt via the snowball method. Paying debt according to the snowball method involves paying more than the minimum payment, as much as you can, toward the smallest debt. The minimum payments total to $303.00 for all four debts. For illustrative purposes in order to compare the snowball method to the avalanche method, let’s calculate how the additional payment of $85.00, paid consistently every month, affects the finance charges and debt free date for both methods. Instead of $303.00 toward debt, this person is paying $388.00 toward debt every month and applying $85.00 toward the smallest debt first, which is Capital One card, for the snowball method. As you can see, the Capital One card will be paid off by July of 2020. The difference that would have been paid to this debt that is now paid off, is applied to the next lowest total debt, which is the Chase card. With the Capital One being completely paid off, the difference from its final payment is now also applied to the Chase card which continues to keep the monthly debt payments at a total of $388.00. When the Chase card is paid off, the payments are then carried over in the same way to the next and lowest debt and so forth until all of the debt is paid.
Comparing the finance charges accumulated in six years just paying the minimums and the finance charges accumulated while paying via the snowball method, you can see below the difference in the finance charges accumulated. And, you can also see below that all of these debts will be paid off by September of 2024. Better this date than never and INCREASING debt, right!?
The Avalanche Method
Now, let’s evaluate paying this debt via the avalanche method. Paying debt according to the avalanche method involves paying more than the minimum payment, as much as you can, toward the debt with the largest APR/interest rate. Again, for illustrative purposes to compare the snowball method to the avalanche method, we are going to apply an additional $85.00, paid consistently every month, above the minimum starting with the debt with the highest APR which is the Wells Fargo card. The Wells Fargo card will be paid off by April of 2022. The difference that would have been paid to the Wells Fargo card that is now paid off, is applied to the next debt with the highest APR which is the Chase card. With the Wells Fargo card being completely paid off, the difference from its final payment is now also applied to the Chase card with the next highest APR which continues to keep the monthly debt payments at a total of $388.00. When the Chase card is paid off, the payments are then carried over in the same way to the next debt with the highest APR and so forth until all the debt is paid.
Comparing the finance charges accumulated in six years just paying the minimums and the finance charges accumulated while paying via the avalanche method, you can see below (on the right) the difference in the finance charges accumulated. And, you can see below that all these debts will be paid off by April of 2024. Comparing the finance charges accumulated between the snowball method and the avalanche method, you can see that the total finance charges accumulated is much less using the avalanche method! Not only that, the debt is also paid off much sooner with the avalanche method! That is a win-win but, so many people pay using the snowball method because it supposedly feels better. I don’t know about you but paying less in finance charges ($1,896.53 less) and paying debt off more quickly (5 months faster) feels better to me!
Combining the Best Method with Budgeting System That Calculates Your Financial Future
Now, one thing that the available apps and programs for debt payoff don’t show you is exactly how to fit your debt payments into your budget along with your regular required payments in a way that maximizes your debt payoff. Now, I have this debt payoff calculator available for you here which will help you compare paying off debt between the snowball and avalanche methods. If you download it, you will be notified when my FREE budgeting system masterclass is available. What my budgeting system shows is, not only how to maximize your payments toward your debt but, an actual payoff date even if your income and/or expenses are not consistently the same. It’s not easy to determine an actual pay off date if you use a budgeting system that is limited. When your budgeting system clearly calculates your financial future, it is very motivating and helps you to stay on track to becoming debt free and accomplishing even bigger financial goals like large purchases or ensuring you are financially secure for retirement. So, be sure to stay tuned for my budgeting system masterclass so I can show you exactly what I mean.
Okay, on to the third debt payoff comparison. So, for this $15,000.00+ debt, we already saw that the avalanche method paid off this debt faster and with less accumulated in finance charges. When you have this debt-calculator linked to your actual budget tracker, it is much easier to find when and where you can pay even MORE toward your debt, thus paying your debt even FASTER and with even LESS accumulated finance charges. For instance, let’s say you were able to find in your budget an additional $25.00 that you could pay toward debt. For example, you come under budget in certain categories like groceries or gas. For now, let’s illustrate how an additional $25.00 to the $85.00 paid consistently each month affects this debt. Now, keep in mind that when you know your precise budget which I will show you how to do very soon, you can pay even MORE than the additional $25.00 some months, without neglecting your upcoming quarterly or annual bills, and tackle that debt even MORE quickly and, again, with even LESS accumulated in finance charges. So, as you can see below, with the additional $25.00 to the $85.00 using the avalanche method, this debt was paid by September of 2023, a whole year faster than the snowball method. And, $8,345.11 in accumulated finance charges, which is $3,316.08 less than the snowball method. Wouldn’t it be awesome to have this kind of control over your finances and get to your desired goals even more quickly than you think?
Again, I will be showing you how debt payoff payments will be calculated more precisely into your actual budget by the end of this challenge. An even bigger goal to strive for is to be able to pay for tuition in cash or with a 529 plan for your children. Also, instead of wasting money on finance charges when utilizing credit cards, you should actually be making money from credit card use! It’s totally possible to accomplish these financial goals and I will show you how. To get an idea of budgeting tasks you must be completing on a regular basis, check this video out:
In order to know how to begin to create a budget and how to truly maximize your income and accomplish your financial goals, you must create a budget for your income now in order to use it in the most profitable way possible. So, if you haven’t downloaded your free budget template yet, you can do so here now and create a budget for this entire year!
Remember, after you create your budget for this year, I show you how it all comes together in a comprehensive lifetime budget that takes minutes a day to maintain.
In the next post, we talk about savings and investment goals everyone should have. Stay tuned!
Happy Budgeting!
Author of “How to Organize Any Space in 7 Simplified Steps“