6 Ways to Pay Off Massive Amounts of Debt
Updated: May 3, 2021
The Avalanche Method You can't argue with math and well, the Avalanche Method uses exactly that. Math not your forte? Fear not, as this budget method is easy to learn and use to payoff massive amounts of debt. First, you start with listing all your debts. Second, you list your debts by highest interest to lowest interest. This may require you to look up your online banking, paper bank statements, or call your bank to find out what your interest rate is. From here, pay off the debts with the highest interest first all the way to the lowest interest debts last. This will ensure that most of your pay cheque goes towards paying off the principle balance of your debts rather than going to interest payments each month.
The Snowball Method Have you ever heard of Dave Ramsey? The American Finance Personality recommends using the Snowball Method to get out of debt. The Snowball Method consists of writing down all your debts from smallest balance to largest balance and then paying off the smallest balance first, then working your way to paying off the biggest balance of debt last. The premise of this debt repayment method is that it allows you to make progress quickly and helps to build motivation for the long run as you win with each small debt being paid off.
The 50/30/20 Budget The 50/30/20 Budget consists of the following income breakdown: 50% to needs, 30% to wants and 20% to savings or debt repayment. This is the budget that helped me pay of tens of thousands of dollars in debt in my twenties when I didn't know what I was doing and was simply learning as I go. Thankfully I've learned my lessons since then! This budget is one of the easiest budgets to use in my opinion, and is very effective in paying off debts as 20% of one's income is allocated to savings or debt repayment each pay cheque.
The Zero-Based Budget This budget consists of listing all of your income and expenses, where expenses are subtracted from the income and the total amount should equal to zero. In some cases, peoples' budgets don't equal zero at the end of the equation so expenses need to be further whittled down (cut). There is an app called the EveryDollar App by Dave Ramsey that is free and helps people utilize the zero-based budget for each pay cheque. This is the budget I most opt to use nowadays because it gives every dollar of my pay cheque a "home" and I also like that each dollar of my pay cheque is allocated to a specific "job".
Debt Consolidation This debt repayment method involves setting an appointment up with your bank to do a debt consolidation. This means the banker works with you to list all of your liabilities (debts) whether these debts are with your bank or outside of your bank (car loans, mall credit cards, electronics store credit cards, furniture credit cards for example would all be included) and a plan to take out a loan to pay all of your debts is made. This makes it so that instead of several debt payments due each month, there is only one payment due to the bank each month. Note that this method usually involves closing out your debts after the loan payment is forwarded. So that means when you get the money from the bank to pay off your debts, the external car loan, mall credit cards, etc must be then closed and not used again.
Balance of Account Transfers This is the method I find to be the most risky because it can involve "robbing Peter to pay Paul" aka using one debt to pay another which can be a dangerous habit. If you find the occasional 0% Balance of Account Transfer and the fee is low, then try it once. This can involve transferring your current credit card debt to another credit card at a rate of 0% for 6 months. But this means that in those 6 months, you must pay down the debt as quick as you can because once those 6 months are over, the interest rate sky rockets again at either 19.99% or more. Note that this debt repayment method also involves fees. (Nope, it isn't free to do a Balance of Account Transfer in most cases.) This method should be used sparingly and should only be used once in my opinion, as getting into the habit of using one debt to pay another isn't best practice and can result in even more debt as time goes on. This is what I aim to prevent.