The Worst Way To Pay Off Debt
The math you’ll see on debt repayment sites is usually straightforward. Starting balances, interest rates, months left until you’re debt free.
The advice is similar. Make a detailed budget, stick to the budget.
Real life is rarely so calculated.
Debt Snowball or Debt Avalanche?
A common piece of advice in the personal finance world is to focus on paying the debt with the smallest balance first (the debt snowball method). This strategy works well because it provides a boost of motivation as each debt is paid off. Getting out of debt is a challenge, no matter what strategy you use, so staying confident is important.
The main alternative is to focus on paying the debt with the highest interest rate first (the debt avalanche method). This strategy works well because it decreases the amount of interest that you’ll pay. Interest rates are particularly important when considering debts like payday loans and high interest credit cards.
What if You’re a Natural Rule-Breaker Like Me?
When I first started paying my debt down, I did neither. That’s right, I ignored mounds of expert advice and the entire field of mathematics to do something completely different.
I started paying the debt with the largest balance and the lowest interest rate.
Why would I do something so counter to everything I’d heard about paying off debt?
I hated that loan.
My highest balance when I first started was an $80,000 student line of credit at a bank. In Canada, some banks offer lines of credit to students in professional programs like law, medicine, and dentistry. I took one out to cover the rest of my education after I maxed out my $50,000 government loan. To me it represented all of my failures – my inability to find higher paying work in my field during university, the decade I made essentially zero dollars, my struggle with shopping addiction. At the time, I just needed it to be lower for the sake of my own mental health.
The Debt Bonfire Method
Paying off the debt that you hate the most is something I’ve come to refer to as the debt bonfire method. It taps into the power of your motivation, similar to the debt snowball method, but it recognizes that motivation can come from different places: the balance, the interest rate, the lender, the story behind the debt. Paying off debt isn’t just about the numbers – it’s about the connection between money and mind.
As I paid this line of credit balance down over the course of a year, something interesting happened. I started to hate it a little less every month. When it was about to drop below $60,000, my mindset shifted. I had some extra funds from a recent raise and instead of throwing them at my line of credit as usual, I made a larger payment on my government student loan instead.
Since then, I’ve been paying the minimum on my line of credit and the remainder on my lowest balance/highest interest rate debt, which fits with both the snowball and avalanche methods.
Sure, I paid a few hundred dollars more in interest than I would have using the avalanche or snowball methods, but you know what?
That’s nothing compared to the ten thousand dollars more in interest I would have paid if I gave up altogether and finished out my term making minimum payments.
I’m still here, I’m still motivated, and I’m still crushing this debt. Much of that has to do with my approach – I’ve focused on finishing this thing, not on cutting my lifestyle to nothing or working as many hours as possible. Just balance and intention.
The best way to pay off debt is the way that keeps YOU motivated. Without motivation, your ingenious plan will be worth nothing. Lowest balance or highest interest rate is a moot point if you quit after a few weeks.