Three different methods to get out of debt.

Please check out my most recent article over on insidestl

My past couple of articles explored the way our brains work in order to help you actively contemplate your purchases to prevent you from buying things that only satisfy the now, yet deprive you of future goals. But what about all that debt that you racked up before you knew what I’ve recently taught you? Below, I’m going to show you a few different ways you can get yourself out of debt and which way I recommend, so you can quit worrying about money and develop a plan to get out of this mess and on the path to financial freedom.

There are several ways you can attack your existing debt, but if you haven’t gotten your current spending under control, your attempts will be futile. Thus, you must commit to spending extra money on paying down debt, not buying more crap you don’t need. I would also like to suggest you clean house, and sell all of the crap you have that don’t use on a regular basis, but I will focus on this in another article.

What are your options to start getting out of debt right now or how should you attack your debt now? In general there are three methods; you can consolidate all of your debt and make one payment, you can pay off all debt by paying off high interest cards first, or you can use the snowball method and attack the smallest balance cards first then the higher balance cards after the smaller ones are paid off. Below, I will explore these three options and give you my recommendation.

Consolidating debt is probably not an option for most people as banks typically want some sort of collateral for the money they loan you to pay off all your cards. That is, they want some asset to hold on to of yours in case you default on the loan.  If you’ve got equity in a home, this would work as adequate collateral if it covered the loan. The problem with consolidation is that it instantly grants you access to all of that credit again, and considering you racked up all that debt once, you will probably do it again, and be in a much worse position than now in just a couple of years. The good side is that if you’ve got a bunch of high interest cards, you can lump all of those debts into one and get a much lower interest rate. The bottom line is, if you’ve been irresponsible with credit in the past you’ll probably do it again, don’t consolidate.

Paying off your debt by first paying down the highest interest rate cards first makes a ton of sense financially, but it probably doesn’t provide as much of an incentive to continue paying off debt as the snowball method does. Paying off the smallest balance cards first provides a snowball effect in that once you’ve paid off the smaller balance cards first, you then take that money you were paying on the first card and apply it to knocking out the next one and so on. Psychologically, the snowball method makes you feel a sense of accomplishment after each debt has been paid off, whereas just paying down high interest rate cards may feel more daunting and unachievable.

The key here is to choose a method that you will stick with, not necessarily what makes the most financial sense. As an accountant, when I first evaluated paying off high interest cards first, versus the snowball method, I thought the snowball method was stupid. However, I’ve since realized that was naïve, and you’re better off picking a method that will continue to provide you a visual incentive to keep going. In essence, the snowball method may cost you slightly more in the long run, but the chances are you will stick with it. My next article will go into further detail on the debt snowball method, as I believe it’s the best way to go for most people.

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