Episode: 304 - The Fastest Way To Pay Off Debt!
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Achieving financial freedom is no small feat, especially when the weight of debt feels insurmountable. However, by implementing effective strategies, the process of paying off debt can become more structured and achievable. Let’s explore proven methods, supported by expert advice and personal success stories, to help you gain control over your finances.
Getting Started with Debt Management
A strong financial foundation begins with a clear approach to managing and eliminating debt. Countless individuals and families have tackled substantial debt and emerged financially independent. The secret lies in adopting realistic strategies and maintaining motivation along the way.
Avoiding Common Debt Payoff Mistakes
Many people unintentionally slow their progress by spreading payments too thin. A common pitfall is trying to pay more than the minimum on all debts simultaneously. While well-intentioned, this approach often dilutes results and delays significant progress.
Another frequently misunderstood method is debt consolidation, which combines multiple debts into one payment, often with a lower interest rate. While this can simplify finances, it doesn’t address poor financial habits. Without adjusting spending behavior, consolidation can lead to more debt rather than less.
Proven Debt Payoff Methods
Two standout approaches for debt elimination are the Debt Avalanche and the Debt Snowball methods, each offering unique benefits.
Debt Avalanche Method
The Debt Avalanche focuses on tackling debts with the highest interest rates first. This approach minimizes the amount spent on interest, saving money over time. However, for those with high-interest debts that also carry large balances, progress may feel slow, potentially reducing motivation.
Debt Snowball Method
In contrast, the Debt Snowball method prioritizes clearing debts with the smallest balances first. This approach builds momentum by delivering quick wins, which can be incredibly motivating. Research supports that these small victories increase the likelihood of sticking to the debt payoff plan and achieving success.
The Importance of Small Wins
Psychological studies show that focusing on smaller, more manageable goals fosters motivation and reinforces positive financial habits. Successfully eliminating smaller debts creates a sense of accomplishment and inspires confidence to tackle larger ones.
Finding the Right Balance
While the Debt Snowball offers motivational boosts, blending strategies can sometimes yield the best results. For example, using a tax refund or a sudden financial windfall to pay off a high-interest debt makes practical sense. Ultimately, the right approach depends on your individual circumstances and goals.
Tools to Support Your Debt-Free Journey
Utilizing resources like a debt snowball worksheet can help you organize your debts and plan repayment systematically. Additionally, tools such as the Debt Freedom Planner can assist with budgeting, tracking, and achieving your financial objectives.
Celebrate Your Progress
Reaching financial freedom requires perseverance, discipline, and celebrating each milestone. Whether it’s staying consistent with a budget, having open financial conversations, or avoiding unnecessary purchases, every step forward is worth acknowledging.
Moving Toward Financial Freedom
Although paying off debt can be challenging, it’s entirely possible with the right strategies and mindset. By focusing on small victories, such as those offered by the Debt Snowball method, and addressing underlying spending habits, you can make steady progress toward a debt-free and secure financial future.
Resources Mentioned
The Totally Awesome Debt Freedom Planner https://www.debtfreedad.com/planner
Connect With Brad
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Transcript
Brad:
Hey guys, I just want to take a minute and just say thank you.
Brad:
You know, thank you for tuning in to our podcast and sharing and being a part of this incredible community here at Debt-Free Dad. We've got some amazing things lined up for 2025. We've got new episodes, fresh strategies and even more tools to help you tackle your debt and build a brighter financial future. But for now, we are spending some time and taking a little break during the holidays and we're serving up our favorite episodes as replays for you guys here over the next few weeks. But don't worry, big things are on the horizon and we cannot wait to share those with you Now, from our family here at Debt Free Dad and to yours, have a very happy holiday season and here's to a debt free and stress free new year.
Brad:
Stay tuned and thanks for listening. So you are on a mission to pay off debt, but what is the best and most efficient method to do that? Now, all five of us on the Debt-Free Dad podcast have paid off tens of thousands of dollars, but the cool thing is, we've also helped thousands of other people saving off tens of millions of dollars with the same methods that have worked in our own lives. So today we are going to take some time to reveal what we know to be the absolute best method, at least in our opinion and experience, to pay off your debt, and why you should use this method. Stay tuned.
Announcer:
You're listening to the Debt-Free Dad Podcast with Brad Nelson. Brad and his co-hosts experience the anxiety of living paycheck to paycheck before learning the fundamentals of financial success. They are now on a mission to empower regular people to pay off their debt for good and enjoy happier, less stressful lives. Keep listening for inspirational interviews, tips, tricks and practical advice to gain financial freedom.
Brad:
Hey everyone, I am Brad Nelson, founder of Debt Free Debt. I paid off $45,000 in debt when I was getting out of debt and have been debt free now for more than 10 years. I've also been fortunate enough to help thousands of other people save and pay off tens of millions of dollars over the years with the work that we do here at Debt Free Debt.
Amber:
And I'm Amber Taylor. We paid off $54,000 in just 20 months and we've been debt free for over five years and I've been working with Brad here for seven years now.
Kati:
And I'm Katie Hatfield. I am still on my journey to debt freedom but, as on a single income, I have paid off in five and a half years over $144,000 in debt.
Ryan:
And my name is Ryan. I have paid off about $160,000 and married with three kids, and we did all that while raising them.
Brad:
Awesome and, as I mentioned in the intro, we are going to be sharing the common methods to getting out of debt here today and what we feel is the most effective method. But, after listening to this episode, if you want to take it a step further, we've got some awesome free stuff. We've got a great free workshop with the debt payoff worksheet that we're actually going to be talking about here today, and we'll be sharing those details coming up later on the show. So, guys, kind of a hot topic. Actually, it's a pretty hot topic when it comes to the methods to pay down debt. Now, there's two that obviously go up against each other quite a bit. We're going to reveal those here in just a little bit.
Brad:
But let's talk about some of the more common methods that probably screw people up the most Like. The first one that comes to mind for me is well, I want to get my finances under control. I want to pay off debt. Well, I'm just going to pay more than the minimum on all of my debts. So what do you guys think? Good, good approach or bad approach?
Amber:
Well, do you see that like that little part? Is that still on the bottom of the credit cards, where the statement where it's like it will take you X amount of years to pay this off when you pay this much or a little bit more? I think it's going to be really slow progress if you go that way.
Brad:
Yeah, I mean you're kind of diluting your efforts, I think, in a lot of ways, by just paying a little on everything, as opposed to focusing just on say a couple, or even just one.
Amber:
Yeah, and it doesn't feel as good Like you don't get that winch.
Brad:
What did you say, Kate?
Kati:
I can attest it is still on the credit card statements. I think legally they have to now to show you like oh, you're going to pay $11,000 more in interest if you only pay your minimum versus paying whatever amount. I think they have to tell you what you have to pay every month for three years to like pay off the card.
Brad:
Yeah, they do. The little chart now, right, it kind of shows you some of the different examples. Yes, but yeah, I mean I think that's, that's it at the end of the day. I mean it's, I mean it's not not.
Brad:
And again, we want to keep in mind none of this stuff that we're sharing is is a necessarily a horrible approach. You have the right intentions, you want to pay off your debt, but is it the most effective strategy? And just paying a little extra on everything every single month? Uh, in my opinion, absolutely not. It is, it is not, and in most, most cases, a lot of people just don't, generally don't have a lot of success with that.
Brad:
Uh, one other area that we see a lot of people getting themselves in I'm sure we can all share some of our little horror stories that we've had with this is consolidation, right, so doing a consolidation loan, or maybe even like taking out like a 0% credit card and you consolidate a bunch of credit cards onto one credit card that's 0%.
Brad:
Or maybe it's like a home equity line of credit, where you take some of your equity out of your home to pay off some debt and consolidate it there. No, the reality is is like they sell this and if you've been a part of our Life Without Payments workshop, which we're going to talk about here, we give examples of consolidation loan ads in that workshop to show people the messaging that they use can be really misleading that this is one of the best methods to pay down your debt. And the reality is for a lot of people a lot of people get more stuck with these types of methods because it doesn't really fix the real problem with their finances, which is the habits, the choices, the behaviors, the lack of intentional or being intentional with your money. It doesn't fix a lot of those things. So the positive side of consolidation is that it feels like you're making progress because you see instant results within your cash flow every month. Right, would you guys? Would you guys agree with that feeling when you guys did it?
Kati:
It definitely was not paying off your debt, which is what they tell you you're doing. It's like, no, it's a balance. You have money that you owe, transfer it's moving somewhere else. That's all it's doing. And, yes, it is 0% for so long and you always have the intention of, yes, I'm going to pay it all off by that point, you weren't doing that before, when you owed it at the higher interest rate. So, yeah, and then my problem I've done this a million times. And then you have so many credit cards with a minimum payment due, so it's a death by a thousand paper cuts, like we call it.
Kati:
And my problem was I went back to those old cards and kept charging more on them later. I wasn't closing them, I wasn't. I didn't stop using those cards. So now I just have twice as much debt and not anymore. That is not a thing I'm doing. Twice as much debt and not anymore. That is not a thing I'm doing, although I have recently, now that I'm paying off more debt, transferred the balances of high interest to 0%, cause I'm like I know I can pay this off. I will be paying this off in the promotional period.
Amber:
It's working. We're all like nodding our heads with you. We're like, yes, yes, we feel you, cause I feel like everybody. A lot of people that are listening maybe not everybody, but a lot are like yeah, I did that. Like I'm like, yeah, I got a car loan and rolled all my credit cards in and then charged back my credit cards. But yeah, I did that. It's, it's relatable, but it's it's not the answer yep I did it.
Ryan:
I think consolidation. I think this is the area where because this is this is going to be the side of it where consolidation can work and it can be effective. For me it was never effective because, kind of going back to what you said, Brad I never fix my behaviors with money, so it was easy to say I owe, let's just say, $1,000 on all of these credit cards. Let's just say $1,000 on all of these credit cards. And if I do this consolidation loan, I only owe 500. And then that extra 500 we have we're gonna use that to pay off the consolidation load as fast as we can.
Ryan:
But because I never address my behaviors with my money, that $500 just got spent on, like what Katie said, charging credit cards back up, doing all these things wrong with my money, even though, upfront, we think we're going to do the right thing. And if you want consolidation to work, I think it, I think it can be a tool and I think it can be effective. But you have got to fix the problem first and the and a lot of times we look at I think for me the consolidation loan was the bandaid to my spending problem. Yeah, and I just put the bandaid on it and it felt good, but I was never really like healing the injury.
Ryan:
I was just like kept putting band aids on it over and over again, and I think that if you want consolidation to be a tool for you, you've got to.
Brad:
You've got to fix your problem before you consider it yeah, you, you took the word right out of my mouth it's, it's. I think that's. The reality is that most people look at consolidation like a's, a band-aid. It takes away the pain, a lot of the pain, right away, maybe even gives you more cash flow every month, makes you feel like again, but with no action after that to prevent it again from happening in the future. It's just you're just adding on to it, and so I think, like you said, it's just band-aid after band-aid after band-aid, with no real treatment of the actual wound that's there is that, especially if you're looking at a consolidation loan, it likely will be more expensive, even though you're paying a lower interest rate up front, because what they're essentially doing is they're taking all of that, they're consolidating it, giving you a lower interest rate, but they're extending the term longer than, say, if you paid it off the original term. So, yeah, up front it looks like you're saving money, but if you calculated that interest over time, in all likelihood.
Kati:
In a lot of cases you could be actually spending even more money on the consolidation loan than, say, coming up with a different method to pay down that debt. And they like to throw in a few extra little fees not so little fees, I should say when they do that for you as a convenience so, at the end of the day, our opinions are are.
Brad:
I mean and I agree with you, ryan, I have seen people use them and they have been successful, but is it the most successful? No, but it can be a part of your plan, depending on your situation, but you got to make sure you're doing a lot of the other things that we talk about, like on this podcast. You're having a monthly budget. You're being intentional, you're living below your means. You're working on building an emergency fund. Uh, you're, you're working on building an emergency fund. You're using a lot of the things that we talk about. If you can do that, it can be something that can work. But simply by itself, without any of the other actions that we talk about, it's likely just going to cause you a lot more pain in the end.
Brad:
All right, let's talk about, at least in my opinion, the two most popular methods. We're going to compare these two. It's the debt avalanche method and then the debt snowball method. So the difference between these two is the avalanche method wants you to pay off your debt using the highest interest rate debt first. So you're going to list all your debts and whatever the highest interest rate one that gets put at the top of the list and you're going to focus on paying extra on that one while making the minimum payments on all of the other ones.
Brad:
All right, the debt snowball method is different.
Brad:
You're going to, on the debt snowball method, you're going to list your debt smallest to largest, by balance owed, instead of interest rates.
Brad:
Now you can put your interest rates on this list, but your interest rates aren't going to determine which debt gets paid off.
Brad:
You pay it off from smallest balance to largest balance. So you're going to, essentially, you know, list all those debts and then you're going to make the minimum payments on all of your debts, except for that smallest debt. You're going to make extra payments on that one and then, once that smallest debt is paid off, you'll roll that minimum payments debt into your second lowest debt and then that becomes your new payment, along with any extra money you pile onto that one. So, essentially, the snowball gets built as your debt gets paid off, because you're rolling the minimum payments into the next minimum payment, into the next one, and you continue this process until all of your debt is paid off, or at least the debt that you want to have gets paid off. In your guys' opinion and based on your experience, what do you guys feel about these two methods or these two approaches? Because these are the two that are probably taught by far the most out of any of them.
Kati:
Well, I believe you've said in the past, brad, if this was a math problem and you're worried about the interest, you probably wouldn't have been in this position to begin with. So, yes, you will pay off a higher balance, but it's probably also a big balance and that's going to take longer and it's more frustrating to pay off than getting those little wins, those smaller debts, paid off. That is encouraging and motivating as you go through the process.
Brad:
Yeah, I would agree. I think you bring up a good point because everyone's situation is different. And let's like you said, katie. Let's say you're starting out and your highest interest debt on the avalanche is, say, a high interest credit card, let's say at 29%, but it's also like an $8,000 balance and you're living paycheck to paycheck and all you can afford is make maybe just making a little bit more than that minimum payment that's due on that. It's going to take you forever to pay that off and in all likelihood, you're going to wave the white flag Whereas, opposed to somebody who might be using the same method they might have a higher interest rate, but that balance might be lower.
Brad:
In that case, it could potentially work for them. So I think, from the avalanche standpoint, it can work. I think it just depends on each individual's situation. Whereas, opposed to the snowball, because you're picking on that smallest debt first, it's faster to pay it off, you get to check it off the list quicker, which is more motivating. Um, I feel like that promotes more progress because you're actually seeing that you're you're making progress right when, as opposed to the avalanche, it might take you some time before you can actually put a check mark on something.
Kati:
I just went through this because I just posted that I had paid off.
Kati:
It was like my first credit card If it wasn't my first one, it was definitely one of the first ones that I got and it always had like a $7,000 plus balance on it and I just paid it off after five and a half years and it had been one of my highest interest rate ones, cause you know, most of mine were 24 to 29% interest, which is just like really hurts every single month. But I had closed this account and I agreed to a payment plan and I'm like sure I'll pay you $150 a month If you drop my interest rate down to 0.99 and they were willing to work with me on it. But if that had been, that was my highest one and the highest interest rate. And if I had to work on that for five and a half years and I got none of my other debt paid off in the meantime, I would not still be here five and a half years later Like that was. I wouldn't have paid off $144,000, for sure. I would have paid off 7,000 and that's about it.
Ryan:
And I think the snowball method is really it. It really helps build habits and it builds momentum. It builds a feeling of like you're accomplishing things. Um, you know, our highest credit card was close to 20,000. Um, and if I, even if I was paying five hundred dollars a month on that, I mean to pay off twenty thousand dollars I mean that could take years to get that done but in that first year we were able to attack smaller debts and we were able to pay off three or four things. And that feels that there's. You can't. You can't like disregard how that feels and the habits you're building and the mindset you're changing by actually paying things off and seeing that there's progress.
Ryan:
And I had the same thing like what Katie just said. I mean if we had done the 20,000 first, I just it just wouldn't have worked. I mean we you just not going to feel like you're making progress, at least for us. And like you said, brad, I mean somebody that maybe someone has a very large income and make it can make a dent in it quickly. Maybe within the first year they could pay something like that off by doing the avalanche method 100%. I mean there's definitely advantages to the avalanche method.
Ryan:
But if you're like a lot of us, where it's like you're, you know you've got 50 bucks left in your checking account. You know it's going to. It could take a long time and get really depressing to kind of see that balance. Every month it shows up and you're like, oh, it went down. You know I paid 500, but 300 of it was interest, so I only paid 200 of it off, you know, um, whereas if you've got a few 500 or a thousand dollar cards laying around and you pay 500 now suddenly, or 200, you can start seeing like, okay, in the next few months this one's going to be paid.
Brad:
Yeah, yeah, I think where where you can and you can actually do both of them in some cases. If you get like a windfall of cash like right, like right now as we're recording this, we're kind of coming around tax refund season for people. You know, if you get a good, decent tax refund and you elect to say, hey, I'm going to use this to pay down some of your debt, you may want to look at your list and say what is the higher interest rates? Because it might make more sense to knock those out with a larger sum of money, but if you're talking about your typical month, I feel like the debt snowball method is the best way.
Brad:
They actually have done a few studies of this. One of them is Harvard Business Review. It says we tested a variety of the hypothesis and it's a hypothesis hypotheses and ultimately determined that it is not the size of the repayment or how little is left on a card after a payment that has the biggest impact on people's perception of progress. Rather, it's what portion of the balance they succeed in paying off. Thus, focusing on paying down the account with the smallest balance tends to have the most powerful effect on people's sense of progress and therefore their motivation to continue paying down those debts. This aligns with other research on the power of small wins to keep people motivated. Again, this is from Harvard Business Review, also the Kellogg School of Management, and the Kellogg researchers at that school found that consumers who tackle the smallest balances first are likelier to eliminate their overall debt. So again, these are just studies of people who are doing it and they're finding that more people are having more success with the snowball method than, say, the avalanche method.
Kati:
I think the only thing that I would say is, like, once I had come to I think it was around a tax refund time, that I had enough money coming in that I could pay off a credit card or my smaller student loan that I would were about the same amount, but obviously the credit card had way higher interest rate because I had refinanced at a good time on my loans and I was like but the student loan I will never have to pay again, I will never be able to recharge that back up, so I'm going to pay that off, so it's just forever gone and I never have to worry about it again. Instead of paying off my credit card, which I know potentially I could charge up again not that my behaviors are to do that, but that was just, in my mind, a logical step to be like okay, now I can take that student loan payment and apply it towards my snowball and really start moving.
Brad:
Yeah, that's when the snowball gets a lot of fun, you know, when you start paying, like that's what is so cool. When you see some of these people and they're like I just I just completed my, my loan or my vehicle and now I have an additional like four or five $600 a month to throw on their snowball, I mean that's when that thing really gets moving. So, hey, if you guys want the debt snowball worksheet to start paying down your debt, then sign up for the free life without payments workshop right now so you can start to have less stress and more happiness with your finances. All you have to do is head over to debtfreedeadcom, click on the link for the free Life Without Payments workshop and this is going to give you everything you need, including your very own debt snowball worksheet with the instructions to fill it out and so much more.
Brad:
So the totally awesome Debt Freedom Planner is helping so many people make consistent progress with their finances, whether that be building emergency funds, paying down bills, budgeting, tracking paydays, saving up for larger purchases, goal planning and planning for those irregular yearly expenses that always seem to catch you by surprise. Now the Debt Freedom Planner will help you take the stress out of managing your money and if the thought is running through your mind hey, I just need to have a simple tool to get my finances together. This planner is perfect for you. Head over to therealdebtfreedadcom, click on the Debt Freedom Planner in the menu at the top of the page and order your Debt Freedom Planner today. Let's talk about your money. Let's talk about all the good things, all the bad things that may be. Let's talk about debt.
Amber:
Let's talk about debt Of the show. First we have Marianne Budget on track Annual expenses updated for sinking funds, emergency fund holding after having to replenish last year, and no eating out this week at work. Brought everything from home.
Brad:
There you go, marianne. Congratulations. Aaron is up next. Aaron says I have been making creative meals with what's in my cupboard. Now, ryan, you actually shared something pretty cool. I've never done this before. You shared it in our group. I don't know if his roots are a little bit of payment something about.
Ryan:
You can ask open AI about some stuff or whatever. Some people have opinions about open ai, but in chat gpt. But if, if it's something you're interested in doing, um, if you like, if you list like 10 ingredients, if you go to chat gpt and say, hey, can you give me some recipes and list the 10 ingredients, um, chat gpt will come back and say, here's some interesting things. And just for fun, if you want to just uh throw some really weird stuff in there, it's pretty interesting, some interesting things. And it just for fun. If you want to just uh throw some really weird stuff in there, it's pretty interesting. Some of the stuff it'll tell you to make, have you ever tried it? Uh, yeah, some, I mean some of it.
Ryan:
It I don't know where it pulls it from. Some of it's pretty like easy stuff. It's like, oh, that's, that's not bad. Um, we did like a beef stroganoff one time. We had some noodles, we had some hamburger, um, and like I'm like I'm gonna try it. It was. It was good. Um, you know, I'm sure it's pulling information from somewhere, but it's just kind of a cool way, like if you just got a lot of random ingredients, yeah, like I don't know what to do with these. Hey, throw it in there. You might be surprised.
Brad:
That's pretty cool I love creative pantry meals.
Kati:
Yes, yes, there you go and sarah said no and her co-workers. Coworkers got takeout for lunch the other day and she just ate her leftovers. Way to go, Sarah.
Ryan:
That's awesome. When Nancy had a discussion with my husband about her finances, no argument involved. Now just putting us on the same page.
Brad:
Yeah that's an awesome win and an awesome place to be. It takes time, takes some patience, but what a great place to be in a relationship so good for you, Nancy. Take some patience, but what a great place to be in a relationship so good for you, Nancy. Hey, as always, congratulations to all of you guys who are taking a stand for your financial life and are wanting better. Hey, we get that getting out of debt isn't easy, but with our help and with the consistency and discipline we promise you, this will be some of the best work that you guys do in your entire life. Thanks for joining us today and we'll see you on our next episode.
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