If you have debt, you’re not alone. Americans’ debt hit an all-time high of $13 trillion in 2017, surpassing the previous record from nearly a decade ago. While the majority of that number is composed of mortgage and home debt, $931 billion—the next highest category—is credit card debt.1
The good news? There are two simple methods you can use to help you pay off your debt so you can feel confident in your finances—and build the financial future that you want.
With both methods, you make the minimum monthly payment on all of your debts with the exception of one that you strategically target to “power pay” faster. Which debt you choose to power pay depends on the method:
Method #1: The snowball method
With the snowball method, you start by paying off the accounts with the smallest balances first, giving you the psychological boost of crossing completed debts off your list. As you pay off the smaller balances, you work through the hierarchy of debts until you’ve achieved your ultimate goal of eliminating debt.
“I think that psychologically the snowball method can work well,” says Dara Duguay, author of several books on personal finance and executive director of the Credit Builders Alliance in Washington, D.C. “You feel like you are making progress.”
Method #2: The debt avalanche
Another approach is to go after the debts with the highest interest rates first, so you pay the least amount of total interest costs over the course of your payback period.
“A person has to select the payment method that is right for them,” says Gail Cunningham, vice president of membership and public relations for the National Foundation for Credit Counseling in Washington, D.C. “If they’re a numbers person, they’ll respond better to power paying the highest interest. If they need that good feeling of accomplishment to stay motivated, they’d be a better fit for power paying the smallest balance first and working their way up the ladder.”
Whichever method you choose, setting a few parameters on how to allocate your money can help you stay on track. “We recommend that people spend no more than 30 percent of their take-home pay on housing and no more than 20 percent on debt,” Cunningham says, adding that your vehicle payment should be included in your total debt.
No matter how you choose to manage your debts, maintaining a balance that allows you to make progress while paying for the things you need is a great first step on the way to finding your financial footing.