How to Crush Your Debt

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One of the first questions that I ask when I teach my Reaching FIRE course is:

What would your life be like if you held no debt?  

I’m not talking about just paying off your credit cards, student loans or even medical bills.  I’m talking about being completely debt-free, meaning no car note, no future payments for your child’s college tuition, and even no mortgage on your home.  

What would that freedom allow you do?

People usually respond saying that they would quit their job.  Some would love to move closer to family. Others say that they would devote time to traveling the world.  In general, people usually want to pursue their passions, whether that be their families, their hobbies, or really anything they love.

 

The problem is that debt can greatly hinder you from reaching your passions and goals.  

 

I love this verse because I can’t say it better myself:

“The rich rules over the poor, and the borrower is the slave of the lender.” Proverbs 22:7

 

Enslaved to Stuff

I like to start my class off with that verse because our society holds such a skewed view.  We have a tendency to think that we need things now.  In reality, many times we just want certain things immediately and lack the patience to wait until we can afford them.  

 

Too many people are caught up in retail therapy.  That type of “therapy” can propel you into a perpetual cycle of accumulating debt, digging you deeper and deeper into debt.

 

The belief is that by buying something, happiness will be the result.  However, it’s usually only a temporary spike that wears off. Unfortunately, the cycle usually leads to misery.  

 

Material possessions cannot produce lasting happiness.  The high will eventually diminish.

 

Believe me, I’ve experienced it first-hand.  I’ve come to realize that my relationships and family are what bring me the most joy.   

 

Debt

Okay, back to debt.  Let’s say that you’ve accumulated some debt over the years and you decide that now is the time to turn things around.

 

First, congrats!  Purposing to crushing your debt is half the battle.  Now, you must decide which plan to follow and then execute.

 

Here are two main methods that get touted when people talk about crushing their debt:

 

Debt Avalanche Method

The Debt Avalanche Method works by prioritizing your debt in terms of interest rates.  Your debt with the highest interest rate should be your primary focus.  Then, you would apply the maximum amount you can towards that highest interest rate balance first, while continuing to make the minimum payment amounts on the rest of your debt.  After you pay off the highest interest rate balance, you continue on to the next highest interest rate balance, and so on and so forth, until you have paid down all of your debt.

 

Snowball Method

The Snowball Method is the method that I personally recommend using.  It involves prioritizing your debt based on the debt balance.  In this method, you tackle your lowest balance debt first.  You would put your maximum amount towards it, while continuing to make the minimum payments for all of the other debt.  You’d continue to do this until you have paid off the smallest debt, which allows you to allocate more funds towards the next smallest debt and so on, until you have paid off all of your debt.  

 

Technically, you may be thinking that this actually is not the best method.  It’s true that you’ll probably pay more in interest using this method. However, there is a caveat.  

 

Did you know that psychology shows that most people are likely to follow through with the Debt Snowball Method in order to get out of debt?  It’s due to the psychological benefit of small wins each time they pay off a debt.

 

While the Debt Snowball method may take longer in order to pay off all of your debt, each “win” will grant you another dosage of motivation to continue eradicating all of your debt.

 

From my experience in teaching the course, I’ve found that individuals who pick the Debt Avalanche, more times than not, either give up or switch over to the Debt Snowball Method.

 

So readers, do you carry any debt?  Have you tried either one of these methods?  Share your thoughts below.