What’s The Best Way To Reduce Debt Quickly?

Posted on August 17, 2018 at 1:53 PM PDT by

Carrying debt, particularly high-interest debt such as on a credit-card, is no way to build a solid financial life. You must reduce debt quickly to even get started.

The problem is interest payments, which compound faster than almost any investment you might make.

Put simply, getting out of debt is the first step toward building wealth.

But how? First of all, consider that some debts are “good” and aren’t necessarily your immediate target. A fixed-rate home mortgage, for instance.

Most other debts — credit cards, home equity lines, persona loans — should be on your hit list for paying off ASAP.

Step one is know your debt. Most people are fine with waiting for a monthly statement and casually eyeing the current balance.

debt reduction

Statements , however, can throw you off. They do not make clear the actual monthly cost of your debt, instead offering a minimum payment due. Really, the minimum is what the lender wants you to pay because it keeps in debt as long as possible.

Write your debts down on a piece of paper or on a spreadsheet, including the due date each month and the current minimum payment. Include the current interest rate you pay for each.

The next step is to save enough each month to pay all those minimums with no fuss. That’s the least you can do. It will be a surprisingly high number once you add it up.

Snowball or avalanche

From here, there are two schools of thought: snowball or avalanche.

The snowball method ask that you order your debts from smallest to largest with the goal of making all of the minimums plus paying off the smallest in a set period of time. That could be the next month, or over six months, so long as you pay it off completely.

There are some psychological advantages here. Seeing a debt disappear from the list is a boost, and you have now freed up that previous minimum payment to apply to your other debts.

The other method is the avalanche approach. Here, you pay the minimums (of course) but dedicate your extra cash to the highest interest rate card first.

The idea is that you’re applying the most cash to your largest interest cost and reducing it fastest, saving on interest. In time that high cost card is paid off, then you move down the list.

In both methods, of course, the major point is to pay off an account completely and never have to send money to that lender again.

For some people, this can be a challenge. It’s very easy to pay down a debt but leave the credit line open and available. Pretty soon some emergency short-term expense appears and you end up using that credit line again.

That’s the opposite of making progress on debt. If that sounds like you, the solution is to pay off a debt and then close that account completely.

Your credit score might suffer in the short run, since you have reduced your available credit. But what’s more important, saving for your future 30 years down the line or keeping your credit score high today?

For most people, unless they are on the verge of buying a home, a credit score is abstract and perhaps unimportant. Having enough money to live well in retirement, that’s completely real and worth your consideration.

MarketRiders, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.