How To Pay Off Debt: 3 Methods Examined

Debt sucks! You know that and I know that (although I wish I knew it sooner). But how do you go about getting rid of it? It can be overwhelming when you have $150,000+ in debt. Personally, we don’t really know where to start. We also don’t know how to keep the momentum going after we get started. So, we explored three different methods to paying off debt.

Debt Snowball

The debt snowball was created by debt counselor and radio host Dave Ramsey. With this method, you basically list all of your debts out in order from smallest to largest. You then keep making minimum payments on all of your debts but the smallest. You attack the smallest debt with all of the extra money that you have in order to get it paid off fast. Once you get it paid off, you then take all of the extra money and roll it over to the next smallest debt. In essence, you are making a “debt snowball” that keeps getting larger and larger after you pay debts off. For an example, let’s take a look at our debt (listed smallest to largest):

1) Best Buy Credit Card: $1,468.90

2) Personal Loan: $1,922.68

3) His Car Loan: $7,279.19

4) Her Car Loan: $8,673.10

5) Family Loan: $16,500

6) Her Student Loan: $48,763.88

7) His Student Loan: $66,070.88

So, for us, we would continue to pay the minimums on each debt but the Best Buy card. Once we get that paid off, we roll over everything we were paying on that each month into the next debt. That will continue until each debt is paid off.

Dave Ramsey argues that personal finance is 20% head knowledge and 80% behavior. So, he states that having these “quick wins” will help keep you motivated.

Highest Interest Debt First

Some people argue that Dave Ramsey is bad at math. After reading that post, I agree with the premise that it is better to pay the highest interest debt first. However, I do also agree with Ramsey that you need some sort of motivation. For example, let’s say that you have five debts: $2,000 on a 0% credit card, $2,000 on a 5% home equity loan, $6,000 on a 7% car loan, $6,000 on a 8% car loan, and $35,000 on a  29% credit card that is at the universal default rate. Common math says pay off the high interest credit card because you are losing A LOT of money. However, you would not pay off any of the debts fast. I think that we would get discouraged if we were in that position.

Now, let’s take a look at our situation. Here are our debts (listed from highest interest rate to lowest):

1) Personal Loan (10.9%): $1,922.68

2) His Car Loan (6.49%): $7,279.19

3) Her Car Loan (5.49%): $8,673.10

4) Her Student Loan (~5%): $48,763.88

5) His Student Loan (~5%): $66,070.88

6) Family Loan (0%): $16,500

7) Best Buy Credit Card (0%): $1,468.90

I’m not sure what the rule is, but the 0% Best Buy card will got up to something like 20% next year. I think that would mean we should move it up the list (the top?). Otherwise, the list doesn’t seem to bad to me. The only thing that bothers us is the family loan being toward the bottom. Our family member said it was alright to pay them whenever, but we feel that it needs to be ASAP. There is something about a family loan that just doesn’t sit right with us right now. It was something that we needed to do at the time (to avoid HARD financial times) but since we are able to pay now, it seems like the right thing to do.

Debt Tsunami

The debt tsunami is a debt reduction method that focuses on paying off debt in order of emotional impact. We really like this approach mostly due to the fact that we have a family loan. In the previous two methods, the family loan was placed toward the bottom of the pack in terms of when it is to be paid off. That’s not acceptable to us in the point in our debt reduction phase.

If it were up to us, this is how we would pay off our debts (emotional impact):

1) Best Buy Credit Card: $1,468.90 (mostly due to the fact that it will go up to 20% next year)

2) Personal Loan: $1,922.68 (we want to pay this next because it’s not much and will be a small victory for us)

3) Family Loan: $16,500 (like I said before, we want to get this paid off fast)

4) His Car Loan: $7,279.19 (after getting the family loan out of the way, we feel it’s best to pay them off in order of highest interest rate)

5) Her Car Loan: $8,673.10

6) Her Student Loan: $48.763.88

7) His Student Loan: $66,070.88

After some consideration, we feel that the debt tsunami is our best option. It allows us to pay off our family loan sooner and then focus on some higher interest rate debts.

How are you paying off you debt? What method to you use and why?

20 thoughts on “How To Pay Off Debt: 3 Methods Examined

  1. The Happy Rock

    Nice analysis Chris. The key is to pick the method that spurs you on towards victory the best. You can’t argue with emotional impact to help ignite your passion for debt destruction.

    It would be interesting to run the numbers as paying off a huge no interest debt 3rd will cost you a decent chunk of change and a few months, but probably not as much as most people think.
    .-= The Happy Rock´s lastest post ..29 Reasons Why Being A Part Time Entrepenuer Sucks =-.

  2. JoeTaxpayer

    I just wrote about this on my own blog at and there offered a link to a spreadsheet for comparing the first two methods.

    In your case above, even without the sheet, I can tell the difference would be minimal, as your high balance debt is at a lower interest rate. (In fact your highest rate is the lowest balance, so that really pushes it to look like little to no difference. It’s when a high rate/ high balance appears that the snowball shows a difference, and I say,”choose what you will, but understand the cost of that decision.”
    Truth is, Adam (Man vs Debt) has brought the only new spin on this topic in years, the emotional cost of being bound to a friend or family member. Even at zero interest, that debt may come first.

  3. Neil


    I like your reasoning. People may promote this or that method for paying off debt but in the end the way that feels right to you and keeps your motivation is the best way (of course it is useful, as the comment above suggests, to use the financial impact to inform your decisions).

    If you have reasonably secure jobs (does that apply to anyone any more?) I would suggest allowing yourself a little boost to your spending budget each time you pay off a debt. The eventual impact on the time taken to pay of your debt will probably be minimal, and it might help to keep you motivated!
    .-= Neil´s lastest post ..The Elusion of Financial Freedom That Debt Can Bring =-.

  4. David

    It’s all about the interest rate!

    With anything in money, I think it’s more important to look at things numerically, rather than doing what feels good.

    You can have a series of victories that feel great, but don’t get you anywhere. Saving $10 a week might feel great, but it won’t have nearly the impact of putting $40 a month into an IRA.

    Although I would treat the Best Buy debt as being 20% interest now, beacuse if you’re even one day late, you’ll have to pay interest on the full amount, not just what’s left.

  5. David

    This article and analysis was very well written (good job Chris!) but is anyone else tired or new adjectives to describe ways of paying off debt? Not the author’s fault by any means…I just get tired of new buzzwords getting thrown around that really have nothing to do with the thing they’re describing.

  6. Paul @ FiscalGeek

    I think the key to any of this is “your” ability to keep on it regardless of the method. The little wins are huge in the long run for keeping you motivated, get those under your belt to help you through the times when you’re slogging through those huge debts that are going to take you months or years to get off your back.

    And don’t get me wrong I’m a Dave Ramsey fanboy but he did not invent the debt snowball, it’s merely the method he has popularized.
    .-= Paul @ FiscalGeek´s lastest post ..Screen Door or Window Screen Repair: Frugal Fix =-.

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  9. lori shaneck

    Thank you for this post. I am in the middle of the unsettling task of listing all of our debt. I know that this is the first step and it is the hardest one. I am so frustrated with the mess we have created for ourselves. Thank you for your insights and supportive posts.

  10. Stephanie

    My husband and I have been trying to find a way to pay off our debts for a long time, i think i’ll present this/thee ideas to him. Great blog here, thank you for this!

  11. Alan

    Your article on this blog is fantastic. Well done! I’m a big fan of your blog and be sure to keep up the great work.
    I plan on returning and linking to your site.

    The Alan Haft Blog,

  12. Damon Day

    All three methods can work very well. As has been said, the key ingredient is the consumer and their attitude about the debt. For some it is strictly a numbers game as David suggests, and for others it is all about getting some small victories racked up quickly as Dave Ramsey suggests. It is up to the individual to decide what will work best for them. Great post Chris.
    .-= Damon Day´s lastest post ..Debt Help – Who can You Trust =-.

  13. Kristen Escovedo

    Great post. I love how you explained each method. My husband and I started this process several years ago with Dave Ramsey’s method. It eventually turned into a hybrid method that worked for us due to some unforeseen medical bills. The most important thing we did was keeping the list visible. We posted it on our bathroom mirror. It was painful to start with, but as we paid off one thing and then another, we felt a sense of victory. We are about to pay off our second car, leaving only our mortgage and student loan. You are right that you have to pick something that will work for you, but those victories are important – at least they were for us.
    .-= Kristen Escovedo´s lastest post ..Waiting for Applause =-.

  14. Laura

    I really love the Debt Tsunami idea. In nothing that I have read has it ever suggested that emotion be a factor in budgeting consideration, yet emotion is the thing that drives us into debt in the first place. How very clever.
    .-= Laura´s lastest post ..Luck Stew =-.

  15. Mari Lovalvo

    Yes, paying off debt, and learning to live without it is the only way to have a good, and satisfying life. There are so many new ways of accelating debt payment. United First Bank offers a computer software program that allows one to eliminate all debt very quickly, including motgage loans. The way it works is that without having to make any extra money, the software program works as an interest cancellation on the debt. In a very short time, the debt is paid off very quickly. I have no debt, so I did not have to use it but my brother has been doing it and he has already saved thousand of dollars in the last 6 months. Excelllent way to go. Congrats on your blog. It’s good!

    1. JoeTaxpayer

      Mari – unfortunately, the software you reference is a scam. The three methods here will beat that product and do it without getting robbed of their $3500 fee. UFirst is not a bank, not a financial adviser, they sell software which is marketed using fraudulent claims. Search around, and you can read hundreds, if not thousands, of posts on this product.

    2. Adam Post author

      I’m 100% with Joe on this one Mari. It is a scam and they will take your money for no good reason. What they sell you is something that you can do on your own for free. I doubt your brother can get his money back but at least you can warn your family/friends in the future.

  16. greengeekgirl

    I really love this debt tsunami approach–I think we’re going to employ that. We’re about 10k in debt, which is … maybe 1/3 of our annual income 🙁

    1. Adam Post author

      We went with the debt tsunami mostly because we have some family debt that we wanted to get rid of.

      Good luck, I’m sure you will do fine!

  17. Greg

    This is an interesting site. I have an advanced degree in applied math and have worked in finance (I-Banking and quantitative analysis) for quite a few years now. My younger sister is starting to ask some of these questions about her own student loans so I’ll offer some of what I discussed with her. Mathematically, there are two approaches. Maximize cash flow today or minimize how much total interest you pay. If you want to have more cash available to you each month asap (uncommitted to debt service) then you should use the “debt snowball” as mentioned above. Minimizing interest is a much harder question. Say you have $20,000 at 3% and $1,500 at 7%. Even though the smaller loan is at a higher interest rate it only accrues $8.75 per month. The larger loan accrues $50. In terms of savings per $1 prepaid, paying off the lower interest rate loan is better. The problem becomes much more complex when you consider different loan terms and the impact of prepayments on the remaining life of the loan and if you really want to get fancy you have to consider the yield of your prepayments against alternative investments.

    Obviously though, doing anything to take control of debt is better than nothing. Good luck.

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