One of the biggest reasons many people begin using a budget is because they are tired of drowning in debt. Everyone wants to live a debt-free life, and that’s an amazing goal! But exactly how do you reach that goal? There are two main methods of becoming debt-free, even if you have a limited income and are struggling to get by. The key is to make debt payoff a priority and pull every little bit you can from non-essential parts of your budget as you begin your debt payoff journey.
Debt Snowball Method
The debt snowball is the most well-known debt payoff method. This method helps you get small wins quickly to keep you motivated and moving forward. The way it works is that you pay off your smallest debt first (regardless of interest) and then roll that payment over into the next largest debt. You keep doing this over and over until all your debts are paid off. So here’s how that might look.
|Debt||Total Owed||Monthly Payment|
|Month 1-10||Month 11-15||Month 16||Month 17|
|Medical Bill||100||PAID OFF!!||PAID OFF!!||PAID OFF!!|
|Car Payment||300||300+100||PAID OFF!!||PAID OFF!!|
|Student Loan||600||600||600+400||PAID OFF!!|
In the above example, you paid off $16,000 in debt in only 16 months by paying $1,000 a month. You can see that as you pay off each debt, you add that debt payment to the next debt, increasing that payment and paying it off sooner.
Debt Avalanche Method
The avalanche method is essentially exactly the same as the snowball method except that instead of paying the lowest balance first, you pay the highest interest rate first. So in the example above, you would most likely pay off the student loan first, as it probably has the highest interest rate. Next would be the car, and finally the medical bill, which probably doesn’t have any interest at all.
The reason many people choose this method over the snowball method is that it tends to help you pay off your debt quicker and pay less interest in the long run. But usually, the difference is so small that it doesn’t make a huge impact. If you lose steam before you gain any wins with the avalanche method, you’re really not going to save yourself any time or money anyway.
The best method is whichever one will keep you motivated and moving forward. If you need some quick wins to get you pumped up, use the snowball method. But if you are more of a numbers kind of person and seeing the amount of money you’re saving on interest gets you fired up, use the avalanche method.
How to make debt-free work for you
Dave Ramsey says to be gazelle intense in your debt payoff. Eliminate all unnecessary spending from your budget while you get debt-free. This is great advice if you are able to pay off all of your debt in 18 months to 2 years. However, if it will take you several years to become debt-free even after bringing in as much extra income as possible and cutting expenses, then it’s time to make a plan that allows you to live your life and still get serious about paying off your debt.
My suggestion is to check out the 50/30/20 rule and apply it to your situation. Here’s how that might look for your debt payoff:
Now, you can decide to split your 20% between savings and debt or you can choose to put it all towards debt to move you along faster. I personally recommend the latter. You want to get out from under debt as quickly as possible. If you’re able and willing, you could even choose to put MORE than 20% towards debt (but I would recommend putting no more 30-40% towards debt unless you know you can pay it off in less than two years – you still need to be able to enjoy life).
But what if I can’t afford my debt payments?
If your current debt payments equal more than what you can afford to pay in a month, then just pay what you can. List all of your debts out on a sheet of paper putting either your lowest balance or your highest interest first (depending which payoff method you’re using), and going down the list. Then just pay as many of those payments as you can until you run out of money. The rest just won’t get paid for now.
If you’re in over your head, your credit score and collection agencies are not your biggest worries right now. Focus all of your energy on paying off that debt as quickly as you possibly can. After you do that and can come up for air, then you can work on rebuilding your credit score (if that’s important to you) and dealing with any fallout. Your main priorities right now should be covering your bare essentials and paying off your debt.
Do whatever you have to do to meet your goals. Take a second job, start a side hustle, and cut out any unnecessary spending. Remember that this is a temporary season in your life and the reward of a life without debt and financial burdens will be well worth the sacrifices you are making now. Keep putting one foot in front of the other and moving forward at all costs.
Debt payoff often seems like an impossible dream, especially when you feel like you’re barely staying afloat as it is. But you can become debt-free by deciding to make debt payoff your top priority and implementing one of these payoff methods. Use your budget to help you stay on track and enlist a few accountability partners to keep you honest about your goals. The more you pay off, the more freedom you will find! In the end, you’ll be so glad you did it!