Paying-Off Debt – Which Strategy Works Best

In my first post, “$80,000 Paid off Twice,” I ask you to track your expenses for a month. Guess what? It has been a month and now you should have the information needed to begin laying the foundation of your financial empire. Now that you understand where your money is going, let’s review some debt pay-off strategies.

Before Ms. Broke Architect and I began our debt pay down adventure, we saved a small emergency of $1,000. And I must admit, we used it several times primarily due to various car problems. Our cars always needed something fixed: brakes, tires and failed vehicle inspections. Every time we took in a car to get serviced, the bill was always at least $750. It was very frustrating. Every time we spent some or all the emergency fund, we would have to stop paying off the debt in order to rebuild the emergency fund. Only after the fund was replenished, we would restart paying down debt.

As our emergency fund grew closer to being complete, we had a decision to make. Were we going to follow Dave Ramsey’s recommendation and use the debt snow ball to pay-off the debt or another method. After doing a little research I narrowed down our options to four approaches:

  1. Pay a Little Extra Approach
    • This is the approach I was taught by family members. I can still hear their voices: “Pay I little extra on your bills so that you never fall behind on your payments.” This was good advice if our goal was just to manage our debt. But if our goal was to be debt free, this was horrible advice. Paying a little extra on each bill is the slowest and most expensive method of debt payment. It would have taken us years to pay-off just a single bill with this approach. Okay, maybe I am exaggerating a bit but there is no way we would have paid off $80,000 in 24 months using this method.
  2. Debt Consolidation
    • This approach would allow us to move our debt around to provide relief. You notice I did not say pay-off debt? During a debt consolidation, we would refinance our home mortgage and take cash payout from our home equity to pay debts. It’s a win-win right? There would be no more consumer debt and a smaller mortgage payment who could argue with that? On the surface, it would have appeared as if the debt was eliminated but reality is that the debt would just be combined with our new mortgage payment. Our student loans, car payments, and various items that we charged on the credit cards would be paid over the length of a 10, 15 or 30-year mortgage. Additionally, seeing that we did not have the money to pay our debt, we most definitely did not have the funds to pay the refinancing fees. So, we would have been adding more debt to get lower monthly payments and paying more money in the long run.
    • Debt Consolidations was not an option available to us the first time we paid off our debt because we did not own a home. Secondly Mr. Ramsey said that people who take this approach usually end up back in debt again because they have not learned how to break the habit of acquiring debt. Little did I know at the time, we were going to be two-time debt payers, who am I to throw stones. I get it, but there were some valuable lessons I learned taking the slow approach to debt payment. The most important lesson is there are no short cuts to financial success. Most quick fixes lead to short term solutions.
  3. The Debt Avalanche Approach
    • This approach was mathematically the most cost effective way for us to pay off our debt. The debt avalanche would force us to focus on paying-off the debt with the highest interest rate first. The steps listed below outline the basics of the debt avalanche:
      1. Arrange debts in order from highest interest rate to the lowest interest rate.
      2. Make minimum required payment on all debts except the one with a highest interest rate.
      3. Use all freed-up money to make enlarged payments of the debt with the highest interest rate.
      4. Once the debt with highest interest is paid off, take all the freed-up cash from paying off that debt and apply it to the next debt with the highest interest rate.
    • Being the math nerd that I am, I love Debt Avalanche. It is efficient and it makes sense. But if personal finances were all about following the math, we would not have had debt problems to start with, right?
  4. The Debt Snowball Approach
    • This is the approach we decided to use. I must admit, it is not mathematically the best way to pay off debt but it had the promise of showing progress the soonest. Debt Snowball forced us to focus on paying the smallest debt first. The steps listed below are what we use in the Debt Snowball approach:
      1. Arrange debts in order from lowest balance to the highest balance.
      2. Make minimum payment required on all the debts except for the one with a lowest balance.
      3. Use all the freed-up money to send enlarged payments to the debt with the small balance.
      4. Once the smallest debt balance is paid off, take all of the freed-up money from paying off that debt and apply it to the next debt with the lowest balance.
    • What I love about this approach is that it delivered as promised. We paid off the first debt and I felt great. When we started our debt snow, my confidence and self-esteem was low. But getting rid of those first few small debts early-on gave me confidence to stay the course. By the end of the snow ball, we were throwing thousands of dollars a month on our debt, at that point I had no problem staying motived.
    • To be totally transparent, doing the Debt Snowball the second time around really sucked. It was one of the worst experiences in my life. I cried, whined, complained and pouted throughout the whole process. There was not nothing I could do to motivate myself to pay-off the debt. I just had to deal with it. I am surprised Mrs. Broke Architect put up me my antics. Every week I wanted to sell something including our home, but she said no. So, my advice to you is: if you get out of debt, stay out of debt because the second time around is like going back to date horrible ex. You find yourself asking how did I end up here again?

Regardless of the strategy you use to become debt free, remember that deciding to pay-off your debt is the first step to become financially free. The path to being debt free will be filled with many obstacles and you will be tested. To be truthful about it, paying-off debt is hard work and requires a lot of sacrifice. What are you willing to sacrifice for growth, freedom, peace of mind, a more secure tomorrow?

I look forward to your comments. Additionally, please like my Facebook page and subscribe to the blog.


The Broke Architect

(-$52,000 negative)

4 thoughts on “Paying-Off Debt – Which Strategy Works Best

  1. Man this what j needed because my wife and I paid of all of our debt but we just recently took out a small car loan. This is kinda stressing us out, even though the car loan is a fraction of what we paid of the fitst time, but like you said it’s a terrible feeling the second time. I needed this article man to keep us motivated and to not be comfortable being “normal”.

    • Justan,
      I am glad this post spoke to you. Get that car paid off and move on, my brother. You are doing the hard work and it will pay off!

      The Broke Architect

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