How To Pay Debt Fast

After reading several personal finance books one of the coolest things that I have learned is how to pay debt fast.

In this article, I will share two different strategies on how you can pay debt fast, no matter what debt you have, whether it’s a credit card, car loan, mortgage, etc.

In the first strategy, you would pay debts based on the smallest debt first, and the highest debt last. In the second strategy you would pay debts based on high-interest-rate debt first, then the second highest-interest-rate debt, etc.

In my opinion, both have pros and cons and we will discuss them in detail. So let’s get started.

Strategy #1: Small debt first, highest debt last

The idea of this strategy is to pay off the smallest debt first. Once you have paid it off then you would take its monthly payment and add it to the second smallest, and so on. The idea behind this strategy is to form a snowball effect so that you can tackle bigger debts more easily.

Example

Let’s see how this is done. Let’s suppose we have the following debts:

With this strategy, you would do the following things in that order:

1. Pay credit card loan totally
2. Once the credit card loan is paid then you would pay the next car loan, but this time you would not pay it with a $1 050 monthly payment, but instead with $1 200 ($1050 + $150). The $150 is the monthly payment part of the credit card.
3. Once you have paid off the car loan, you would pay off the student loan next with a monthly payment of $1763 ($563 + $1 200 = $1 763).
4. Once the student loan is paid off, you would take its total monthly portion of $1 763 and add it to the next lowest debt monthly portion. In our case, it would be a mortgage. Thus the new monthly payment of the mortgage is $3 763.
5. Pay off the mortgage and you’re done

A simple, yet effective strategy. Now let’s take a look at how long this would have taken, how much you would have paid interest, and what would be the final price vs. the price you would have paid if you would have paid it normally.

After paying off the credit card (48 months), the situation would look like this:

Next, we have a car loan. The car loan monthly payment would be now $1200/month. Will be paid after 78 months from the beginning. The situation would look like this:

Next, we have the student loan. From this, on we pay for the student loan you would be paying $1 763/month. The student loan would be paid after 118 months from the beginning. The situation would be looking like this:

The final loan is the mortgage. The monthly payment for it would be from this $3763/month. This will be paid in 88 months from the last loan paid off. Thus the situation would look like this:

All debts would have been paid in 206 months. In comparison to see if we would have paid all debts on a monthly basis without using this strategy, we would have paid the following amounts:

The final amount to be paid would be a staggering $947 645 with interest.

Now let’s see the difference with this strategy. You would have ended up saving $947 645 – $778 834 = $168 811. That’s a huge amount of money that could be used for investing or building your wealth to grow your net worth even more. So just by implementing this strategy, you would have saved that much.

Another good thing is for example with this strategy you tackled the mortgage in just 206 months (17 years, 2 months) vs. 360 (30 years).

Now let’s see quickly this method’s pros and cons next.

Pros

• High debts like mortgages for example monthly payments will get larger in the end, making it very fast to pay them off
• small debts are paid fast
• the bigger amount of debts and their prices the more money you would save money.

Cons

• You might have to pay much more interest rates with high debts because they are tackled at the end

Strategy #2: Pay the highest interest rate debts first and the lowest last

If you want to pay your debts in a such manner that you would try to pay as less interest rates as possible, then this is a strategy you could go with.

The idea behind this strategy is that you tackle first a debt that has the highest interest rate and not the debt that is the smallest in amount. Then once you have paid that debt off you would take again its monthly payment portion and add it to the second highest interest rate debt in order to cause again the snowball effect so that we can effectively pay the debt off fast.

Example

Let’s see some examples. With the above four debts, let’s add payment time and also interest rates. I try to be as realistic as possible with interest rates.

Time to do calculations. Let’s see how much this would have taken us. I hope this might not look confusing, but I try my best to show you how fast you can pay with this strategy and how much you end up paying on average interest.

After paying the credit card loan in 4 years, the situation would be like this:

As you can see the amount of interest already is quite crazy and thus far you have paid interest of a staggering $206 068.

Next is the renovation loan. This time we would pay $1 220/month. Once you have paid it the situation looks like this:

Next, we have a car loan. From this on the payment would be $2270/month. Now the situation looks like this:

Thus far we have paid $351 822 with interest. Once we have paid the last debt, that is mortgage I will show you the comparison, of how much you would have paid with a normal payment plan without tackling any of these debts fast. Then you can see the real picture.

Now that we have paid all other debts, the new monthly payment for the mortgage would be $4 270/month.

Now the situation looks like this:

Now that all debts are paid with strategy, the final price to be paid is $691 986. This is a very big sum of money. Only the interest on this is $266 986, which is quite crazy.

Let’s see now how much you would have paid with a normal payment plan and see the difference in interest and how much you would have ended up paying.

As you can see totally paid with a normal payment plan would be $901 447. That’s so crazy. The only interest portion is $476 447. The difference between totally paid with the normal plan and with this strategy would be $901 447 – $691 986 = $209 461.

That’s a huge saving, again with this you can invest it in something for it to make you more money.

Conclusion

Now you might ask how this can help you achieve financial freedom. Well there are three huge things this would help you achieve financial freedom and they are:

• Becoming debt free
• The money you have saved with those strategies can give you a very good kick start if you decide to invest it for building your wealth
• Have the possibility of helping you retire earlier

So what you could do next? I highly recommend using one of the above strategies provided above. The earlier you start the better.

Once you have paid all debts, consider starting investing. Since you have now become debt free what you could do is the monthly payment you used to pay for your debts, use 50% for investing/building your wealth, and the rest 50% for your emergency fund if you haven’t saved for it yet. You should have at least emergency funds enough to cover your expenses for 6-12 months.

I hope you find this post useful. Let me know in the comment section below which strategy you like more, why, and whether are you going to use them or have you implemented them in your case already.

If you have any personal feedback or comments, feel free to contact me via the Contact page.