The Best Way to Pay Off Debt

Consider the "debt snowball" approach, with a few modifications.

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If I learned anything from Star Trek, it's that humans, a community of which I consider myself a member, do not always make decisions based on logic. If we followed the mathematic principles of addition and subtraction, fewer of us would find ourselves in unmanageable debt. Aside for unexpected major expenses, many people buried by credit cards and loans are in this position due to the emotional and psychological aspects of spending money, not necessarily a momentary lapse in mathematical reason.

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I understand when financial gurus appeal to these emotions in order to help people get out of debt. They are, after all, marketers with a product to sell, just like those who convince consumers to spend money. The most powerful marketed solution for getting out of debt may be the "Debt Snowball" method, promoted by the religion-focused financial writer, Dave Ramsey.

What isn't made clear to his followers is that the Debt Snowball is not efficient. With a few modifications, you can pay your debt off faster and less expensively. The same system with one minor adjustment could reduce interest payments considerably.

To adhere to the Debt Snowball, the system suggests you order your debts from smallest balance to largest balance. Each month, pay the minimum due to each of your creditors, but add excess funds to the debt at the top of the list. That will accelerate the pay-off of the top debt. Once this one has been eliminated, your second debt becomes the target and the process continues.

This method ensures you see the success of paying off your first debt quickly, in theory motivating you to continue following the system. This emotional approach, however, appeals to the same aspects of a personality that could allow consumers to fall back into debt through excessive spending.

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Consider revising the Debt Snowball to order your debts from the highest interest rate to the lowest, considering tax benefits. Getting rid of high-interest credit cards before low-interest high-balance loans or a tax-advantaged mortgage will cost less money in the long run. The sizes of the balances are irrelevant. This method will also allow you to be completely debt-free in less time than the plan Debt Snowball if you stick with the program, motivating yourself to continue throughout. You can create quick wins by setting and celebrating debt repayment milestones, such as a "$1,000 paid off" target or a "$10,000 paid off” target.

While this is mathematically the best solution, it may not be perfect for you. A $10,000 car loan from the bank and a $10,000 loan from your parents may not be created equal. You may be more motivated to eliminate a personal loan before accelerating other debts in order to ensure your relationship survives the arrangement, even if your parents aren't charging interest. For situations like these, it may be more worthwhile to set up your list of debts to be repaid in order of importance to you, with interest rates as a starting point.

The Debt Snowball method has many adherent followers. Unfortunately, this does a disservice to individuals who are in debt and need to start making financial decisions with an eye towards logic rather than emotion. If paying off debt by focusing on the smallest balance first is the only way you'll complete the system, it's better than not doing anything. Rather than blindly following a system, take some time to determine what is best for you and your family.

Luke Landes writes for Consumerism Commentary, where he encourages discussions about money and consumer issues. Consumerism Commentary regularly tracks and reviews the best online savings accounts and other financial products.