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The Quickest Way to Get Out of Debt – A Guide to Choosing the Right Strategy

Michael Reynolds | May 25, 2023

[Prefer to listen? You can find a podcast version of this article here: E185: The Quickest Way to Get Out of Debt – A Guide to Choosing the Right Strategy]

Debt is often a way of life for millions of Americans. We are conditioned to buy things on credit, including cars, appliances, home improvements, and everyday things. While debt is sometimes necessary, it can also have a negative impact in our lives.

The impact of debt on millions of American individuals and families is substantial. Here's how it typically manifests:

  • Impacts on Daily Life: Those with significant debt often find their financial resources drained, making it difficult to cover even basic living expenses. A 2019 survey by Northwestern Mutual found that the average American had about $29,800 in personal debt excluding mortgages, and 45% of those surveyed spent "up to half of their monthly income on debt repayment." This can severely limit a person's ability to afford necessities like food, housing, and healthcare.
  • Impacts on Mental and Physical Health: Studies have shown that debt can lead to stress, anxiety, and depression. The constant worry about making ends meet can also lead to physical health problems, including high blood pressure and other stress-related illnesses.
  • Impacts on Long-Term Financial Goals: High levels of debt can interfere with long-term financial goals, such as homeownership, retirement savings, or funding a child's education. A study from the National Bureau of Economic Research found that the increasing student loan debt has led to a decrease in homeownership among young adults. Similarly, according to the Center for Retirement Research at Boston College, "those with student loan debt accumulate 50% less retirement wealth in their 401(k) by age 30."
  • Impacts on Credit Score: Debt, particularly if not managed well, can lead to a lower credit score. This can make it more difficult to qualify for credit in the future and result in higher interest rates when you do. This can lead to a vicious cycle of borrowing and debt.
  • Impacts on Family Dynamics and Relationships: Financial stress due to debt can strain relationships. A study by Jeffrey Dew at the Utah State University found that couples who argued about money once a week were twice as likely to divorce as those who argued about finances less often.

Many individuals and families find themselves in over their heads and drowning in debt. This can be in the form of credit cards, student loans, car loans, HELOCS, and IRS debt, to name a few.

Once debt reaches a certain point, many people find that they've had enough and have a desire to get rid of their debt. But this can sometimes feel like an overwhelming task.

Luckily, there are methods that can help you get out of debt faster.

Finding the right method for paying off debt will depend on multiple factors, including your personality, your financial situation, and the nature of your debts.

Among the most popular and effective tools to help you get out of debt include:

  • The debt snowball
  • The avalanche method
  • The "anger" method
  • Debt management programs
  • A hybrid method that uses two or more methods

Here is an explanation of each method and how it may apply to your situation.

The debt snowball

The debt snowball method is a debt repayment strategy where you pay off your debts in order of smallest to largest, regardless of interest rates. This strategy is intended to help you build momentum, like a snowball rolling down a hill.

Here's how it works:

  • List your debts from smallest to largest: This order does not take into account the interest rate. It's purely based on the amount owed.
  • Make minimum payments on all your debts except the smallest: The smallest debt is your primary focus and you should pay as much as you can towards this debt each month.
  • Pay off the smallest debt as quickly as possible: By focusing all your extra money on the smallest debt, you aim to eliminate it quickly.
  • Once the smallest debt is paid off, move on to the next smallest debt: Apply the amount you were paying on the first debt to the next debt on your list, in addition to the minimum payment you were already making on the second debt.
  • Repeat this process until all your debts are paid off: As you pay off each debt, the amount of money you can apply to the next debt increases, creating the 'snowball effect'.

The debt snowball method is effective primarily because of the psychological momentum it creates, often described as the "small wins" approach. This method capitalizes on the human tendency towards achieving short-term, tangible goals.

Here's why:

  • Sense of Progress: By paying off the smallest debt first, you quickly see a debt completely eliminated. This gives a feeling of progress and achievement, making the overall debt seem more manageable. This feeling of accomplishment can provide the motivation to stick with the plan and move on to the next debt.
  • Positive Reinforcement: Successfully paying off a debt, even a small one, reinforces the belief that you're capable of clearing your debts. This can increase your confidence and motivation to tackle larger debts.
  • Simplification: Each debt you pay off means one less payment to think about each month. This simplifies your financial situation, making it easier to manage, which in turn can reduce financial stress and make the process seem less overwhelming.
  • Behavioral Change: The snowball method encourages individuals to change their spending behaviors and habits. It provides structure for repaying debts, and the success of seeing debts disappear can incentivize maintaining better financial habits in the future.

While the debt snowball method might not be the fastest or the least expensive method of repaying debt (since it doesn't consider interest rates), it works because it plays into human psychology and our desire for quick wins and clear progress. This emotional boost can be exactly what some people need to stay committed to a long-term debt repayment plan.

The avalanche method

The debt avalanche method is another strategy for paying off debt, but unlike the debt snowball method, it prioritizes debts with the highest interest rates.

Here's how it works:

  • List Your Debts by Interest Rate: Start by making a list of all your debts, from the highest interest rate to the lowest. This often means that things like credit card debts will be at the top of your list, while lower-interest debts like student loans or car loans may be at the bottom.
  • Make Minimum Payments on All Debts: Each month, you'll make the minimum payments on all your debts. This keeps all your accounts in good standing and prevents your debts from growing larger due to late fees or penalties.
  • Pay Extra on the Debt with the Highest Interest Rate: Any extra money you have for debt repayment should go towards the debt with the highest interest rate. This reduces the amount of interest you'll pay over the life of the debt.
  • Repeat Until All Debts Are Paid Off: Once the debt with the highest interest rate is paid off, you move to the debt with the next highest interest rate, and so on, until all your debts are paid off.

The advantage of the debt avalanche method is that it saves you money in the long run, as you'll pay less interest overall. It may take longer to see progress, since high-interest debts may also be larger debts, but mathematically, it's a more efficient strategy than the debt snowball method.

However, the challenge with the avalanche method is that it requires discipline and patience, as progress may seem slow at first. It may not offer the same quick psychological wins as the debt snowball method, but if you're able to stick with it, it can be a very effective way to tackle high-interest debt.

The "anger" method

Another method of debt repayment is the "anger" method.

The selection of a debt repayment strategy is, in many ways, a deeply personal process, often intertwined with our emotional responses to the debts we carry. It's essential to consider the motivational factors that will sustain your commitment to your debt repayment plan. At times, certain debts might provoke a stronger emotional response or cause more distress than others.

In such circumstances, a unique strategy called the "anger method" could be the most appropriate. This method involves identifying the debt that triggers the most negative emotions or stress, and focusing on paying that one off first.

The "anger" can stem from various sources. For example, it could be a car loan for a vehicle an ex-spouse is currently using. Paying for an asset you no longer have access to might stir feelings of resentment, making this debt a prime candidate for the anger method.

Alternatively, you could have a loan from a family member that carries the risk of damaging your personal relationships. The fear and discomfort arising from this situation might make you particularly eager to resolve this debt as soon as possible.

In another scenario, you might owe money to the IRS. The anxiety associated with this debt might fuel your desire to expedite repayment of this particular debt.

In essence, the "anger method" channels your negative emotions associated with a specific debt into motivation to pay off that debt first. By tackling the most emotionally burdensome debt, you may feel a sense of relief and achieve a significant psychological victory, which can boost your confidence and motivation to face the remaining debts.

Debt management programs

Non-profit debt management programs, like those offered by the National Foundation for Credit Counseling (NFCC), provide an array of services designed to assist individuals in financial distress and help them gain control over their debt. Here's an overview of how these programs work:

  • Counseling and Education: The process typically starts with a one-on-one session with a certified credit counselor. They review your overall financial situation, including your income, expenses, and debts, to gain a comprehensive understanding of your financial health. The counselor will discuss different options for managing your debt and provide financial education to help you make informed decisions.
  • Debt Management Plan (DMP): If it is determined that a Debt Management Plan is your best option, the credit counseling agency will help you establish one. A DMP involves consolidating your unsecured debts into one monthly payment, which you make to the counseling agency. The agency then distributes the payment among your creditors.
  • Negotiations with Creditors: As part of a DMP, the credit counseling agency negotiates with your creditors on your behalf. They can often lower interest rates, waive fees, and arrange lower monthly payments. This can make your debts more manageable and help you pay them off faster.
  • Regular Payments and Tracking: Once your DMP is in place, you make regular payments to the counseling agency, which disburses the funds to your creditors. The agency tracks your progress and provides periodic updates.
  • Continued Support and Education: Throughout the process, the counseling agency provides ongoing support and financial education. This helps you stay on track with your DMP and build better financial habits for the future.
  • Completion of the DMP: Once you have made all the payments under your DMP, your debts are paid in full. This does not mean all your debts are paid off – only those included in the DMP.

It's important to note that while these programs can be very helpful, they're not a quick fix and require commitment. DMPs typically take 3-5 years to complete. Also, not all debts can be included in a DMP, and while in a DMP, you're usually required to close your credit card accounts, which may impact your credit score. However, if you're in serious financial trouble and committed to getting out of debt, a non-profit debt management program can be a great resource.

When looking for a debt management program, it's important to be aware of the difference between non-profit providers and for-profit providers.

For-profit debt management services (which often use the term "debt relief") tend to take a more aggressive approach to paying off your debt. In this approach, the firm will generally settle your debts on your behalf. This can get the debts paid off faster but in turn can do more damage to your credit, which can take years to recover from.

Non-profit providers take a more conservative and balanced approach which generally does not damage your credit as much. They keep your accounts open and negotiate better terms, which keeps your accounts in good standing.

Hybrid methods

While each of these methods can work well independently, it can make sense to combine them in order to get out of debt faster.

For example, let's say you have the following debts:

  • Car loan with a $12,000 balance, $325 monthly payment, and 6% interest rate
  • Visa with a $3,000 balance, $100 minimum payment, and 15,99% interest rate
  • Loan from your parents with a $5,000 balance, $50 monthly payment, and 0% interest rate (but your dad keeps bringing it up)
  • MasterCard with a $10,000 balance, $200 minimum payment, and 17.99% interest rate
  • Kohls card with a balance of $2,500, $75 minimum payment, and 12.99% interest rate
  • Outstanding medical bill with a $20,000 balance, $500 monthly payment, and 5% interest rate

How would you attack this debt?

You could use the debt snowball method but you may lose motivation because you are annoyed by the loan from your parents and you are stressed out about the medical debt.

You could pay off the loan from your parents first (the "anger method") but it seems so overwhelming because you keep thinking about all the other debts.

A hybrid approach could look like this:

Work with a non-profit debt management service to create a debt management plan that includes the credit cards and the medical debt. This consolidates the debts into one monthly payment. Because the debts were negotiated with lower payments and lower interest rates, your total monthly payment is lower than before.

Now the debts look like this:

  • Car loan with a $12,000 balance, $325 monthly payment, and 6% interest rate
  • Debt management program with a $35,500 balance, $450 monthly payment, and effective interest rate of 4%
  • Loan from your parents with a $5,000 balance, $50 monthly payment, and 0% interest rate (but your dad keeps bringing it up)

Payments are more manageable and the number of "visible" debts is lower, which reduces stress.

Now, you can use the anger method and put extra money toward the loan from your parents in order to get it paid off as quickly as possible. Once that's done, you roll those extra payments into the car loan (debt snowball). Once the car loan is paid off, you can start using the extra cash flow to pay more toward your debt management program.

Note that this is a hypothetical illustration and does not guarantee any specific numbers or outcomes. Your specific situation will vary.

Choosing the right method for you

When determining the quickest way to get out of debt, keep in mind that it's not always just about the math. Typically, the avalanche method is mathematically the quickest way to get out of debt. But if you don't stick to the plan because you lose motivation, does it truly end up being the quickest?

On the other hand, if you hate paying interest and find motivation in minimizing interest paid, the avalanche method may work for you.

If you need quick wins or there is a debt that drives you crazy, the snowball or anger methods may be a good fit. And don't forget to combine the tools available to create a plan that is right for you.

Getting out of debt is as much about emotion and behavior as it is about math. The important thing is to be intentional and have a plan. Getting out of debt does not happen overnight and it does not happen without focus.

Create a debt repayment plan that takes into account not only the numbers but also your personality and your emotional perspective. Ultimately, the quickest way to get out of debt will be the one that leverages your strengths and motivations.