I don’t need to tell you that debt is bad.
You know that.
You already know that student loans, car loans, and credit card debt are amongst the top ways in which people get in over their heads.
You may even be one of these people drowning in debt.
But you don’t have to be.
Here’s the thing, you know debt is bad for you, and you want to get out, but it’s extremely hard.
Notice I didn’t say “You know debt is bad, but you don’t know how to get out.” I didn’t say that because it’s just not true.
You know how to get out.
Stop spending more money than you make, and use the excess money to pay down your debt.
But that’s difficult to practically do.
You may know how, but that’s not even half the battle. Actually paying down your debt is an entirely different story.
But it is possible.
I’m going to lay out the best methods for getting rid of debt. All you have to do is choose one, and get started.
Here are the top two ways to systematically pay down debt.
- Debt Paydown for Nerds
- Debt Paydown for Everyone Else
Both of these ways will work and lead to the same end result, but they take very different approaches. And ultimately it comes down to knowing yourself and what will work best for you.
Debt Paydown for Nerds
The nerdy way to pay down your debt is to focus on the numbers.
The word so many people hate all through grade school. If you’re a numbers driven person and compelled by facts, then this is the method for you. (If numbers are meaningless to you, just go ahead and skip to the section for Everyone Else).
Alright, so the way this method works is that you organize your debts based on the Annual Percentage Rate, or APR, associated with the debt.
(If you’re already lost, no worries, APR is fancy for the extra money the lender charges you every year).
Then you start paying the minimum payments on ALL debts except for the one with the highest APR. For that one, you pay as much as you can each month to aggressively get rid of that specific debt first.
Once you have erased the debt with the highest APR, then you move on to the next highest APR and repeat the cycle.
You continue this cycle systematically paying down debts in order of the highest APR until all of your debt is erased and you reach the coveted classification of “Debt Free!”
That’s it, that’s all there is to it.
You bet it is.
The Nerdy Method isn’t for the faint of heart. It’s going to take hard work and major will power to stick it through to the end.
But it’s worth it.
Example of the Nerdy Method
The major benefit of the nerdy method is that it saves you the most money over the long term.
Ultimately this method is focused on minimizing the amount of money paid in interest by getting rid of the high-interest rates first.
Here’s how this would work.
Let’s say you have 6 debts that look like this: (not unreasonable for a 20something fresh out of college)
So your total debt is $20,050 with 2 credit cards, 1 car loan, and 3 student loans.
And your total monthly minimum payments to keep everything in good standing is $394.73.
I know I just threw a ton of numbers at you, but don’t get too bogged down. I’m just the setting it all up.
Here’s where things start to get interesting.
Let’s say you recognize that the most important thing right now is to rapidly eliminate your debt. In order to do that, you start cutting out frivolous expenses and pick up a part-time job on the weekends to make some extra cash.
Because of all this hard work you’re able to not only pay the minimum monthly amount but you’re also able to contribute an extra $400 per month to crushing your debt! (hint: this is only an extra $100 per weekend which is fairly easy to obtain working a minimum wage job)
You’re following the nerdy method, so you start contributing an extra $400 per month to debt number two because it has the highest interest rate at 19.7%. This means you’re paying $442 (minimum $42 plus the extra $400) towards this credit card every month until it’s paid off.
It takes 5 months to pay this first one off and then you go to the next credit card at 16.7%.
This is where things start to get exciting.
Now you take all the money you were using on the first credit card and include that in your payment for the second credit card. This means you have $442 plus the minimum payment of $25 for a total of $467!
But remember, you’ve already been paying the minimum $25 every month while attacking the first credit card. So now the balance is down to $246.52.
You take care of that payment in one single month and even have left-over money to start paying down the next highest interest rate.
You continue this trend rolling over money every time from one payment to another until you’re down to only one single debt.
At this point, it’s the debt with the lowest balance, which is the car loan at 4.25%. But now you’re able to use all of your extra money and the money you were using for the other minimum payments. This means you can start crushing your car loan by paying a whopping $794.73 per month!
At this rate, you’re able to knock out the car payment in only 11 more months!
And then it’s all over.
You’re totally debt free and you did all that in just 2 years.
See the table below for all of the details.
Key Findings for the Nerdy Method
Like I said earlier, the main goal of the nerdy method is to get rid of debt as fast as possible and pay the least amount of interest possible.
For the example above, you’re able to get completely debt free in 24 months and only pay $1,031 in interest.
In order to really see the benefits of this method, you will need to compare it to the other method (which I do below).
Just remember going forward that the nerdy method is logical, fact based, and numbers oriented.
The downside to this method is that it can sometimes take a while before you feel any major progress. For example, using this method it takes you 5 months of working hard before you completely pay off any one of the six debts.
After you pay the first one off things start to move a bit quicker. But it takes awhile for the ball to start rolling.
Which brings us to the 2nd method.
Debt Paydown for Everyone Else
This method is less focused on logic and more focused on feelings and emotions.
You may be wondering why this matters if we’re talking about money, which is inherently based on numbers.
And yes, while finance is numbers based, the problem is that people aren’t.
Come on, admit it.
You know you don’t think in numbers.
You think in feelings. INSERT GOOD FEELINGS MEME HERE
Some studies are even concluding that up to 90% of decisions are made based on emotions rather than logic.
Even the purchases you make are based more on emotions and the subconscious than on rational thinking.
And this is the problem with the Nerdy Method.
The Nerdy Method focuses solely on logic, reason, and numbers.
So what is this other method that works for everyone else?
While it’s been called many things, the most popular term is the Debt Snowball Method.
It works by starting with the debt that has the lowest balance instead of starting with the one with the highest interest rate.
It works because it gives you small wins up front. Normally people have at least one debt that is considerably small and could be paid off within a month or two. This gives them a small victory and starts building the momentum required to keep going.
Remember back to the example above, you’re able to pay down your debt quickly because you are living frugally and working an extra job on the weekends.
That’s super hard.
And if you don’t see some sort of pay off quickly, you’re very likely to give up and go back to your normal routine.
But don’t just take it from me, a Northwestern University Study found that paying off debt accounts regardless of the size is actually a better predictor of complete debt repayment than the size of the remaining balance.
In normal people words: this means that humans are emotional, and if they focus on just getting the lowest debts paid off, they have a much better shot at getting completely debt free.
Will you theoretically pay more in interest by using the snowball method?
But will you be more likely to actually get debt free?
But just for the sake of argument, let’s look at just how much extra money and time you will spend by using the snowball method.
Example of the Snowball Method
I’m going to use the exact same example and numbers used above for the Nerdy Method, but this time, we will start with the lowest balance.
So here’s the table again showing all the outstanding debt.
For this method, we will start with debt number 1 which is only $350. And remember, you’re adding an extra $400 on top of the minimum balance. Which means you can pay $425 for the first month towards that debt.
But wait a minute.
Debt number 1 is only $354.87 with interest which means you can immediately pay this off!
Then you can take left-over money of $70 and use it for the next lowest balance.
You’ve already paid off one debt completely and it’s just now the end of month one!
Let’s keep going.
The next lowest balance is debt number 4 and after month number one it’s only $717.89.
With your extra money from eliminating the first debt, you’re now able to pay $439 per month. This means that in only 2 more months you’ve completely eliminated another debt!
Do you realize how big of a deal this is?
In just 3 months you were able to completely erase two debts.
The Nerdy Method didn’t eliminate any debts until after month 5.
Now you can see why this method is so powerful.
Here’s the table showing the rest of the payments.
Key Findings for the Debt Snowball
The snowball method starts off strong by helping you attack the low-hanging fruit.
By aggressively paying down the lowest balances first, you start building momentum that inspires you to keep going.
It’s so exciting to finally see your debt going away that you stay focused on eliminating all of your debt instead of getting discouraged by how slow things are moving.
But what about the extra money I paid??
I know, I know, that’s the question your asking.
Well, let’s look at it in terms of this example.
To recap, the Nerdy Method eliminated all debt in 24 months and paid $1,031 in interest. However, the Snowball Method eliminated all debt in 27 months and paid $1,254.10 in interest.
So yes, the Snowball Method did cost an extra $223 in interest and an extra 3 months of time.
But let’s put this in the context of savings to you.
Over the course of the 24 months that it took to eliminate the debt using the Nerdy Method, by saving an extra $223 that works out to be about $9.30 per month.
The bottom line is that this method didn’t actually end up saving very much at all. And compared to the Snowball Method, you’re far less likely to stick with the Nerdy Method (which means you won’t actually save that money because you will probably quit too early).
It is important to point out that this example is just that; an example. Which means that your situation may differ. Depending on the debt balances and interest rates the Nerdy Method could save you a lot more or a lot less than the example above.
But the fact still remains that the savings may not be as much as you think.
So What Should You Do?
Ultimately this decision will have to be made by you.
You need to figure out what kind of person you are and be honest with yourself.
Are you the type of person that is motivated by knowing that you’re getting the absolute best savings regardless of how large it is?
Or are you the type of person that needs small wins to keep you going?
Hint: You’re probably the second.
How do I know that?
Because almost everyone is.
Humans are emotional creatures. And while there may be a few Spocks out there, you’re most likely just a normal person.
And for you, I highly recommend considering the Debt Snowball.