Looking to get out of debt—for good? You’ve come to the right place. Let us introduce you to the 3 most popular ways to do it…(and 1 bonus method).

1. Snowball Method

The debt snowball method is a technique for paying off debts that involves focusing on the ones with the smallest balances first while making the minimum payments on the others. As you pay off each debt, you roll the minimum payment you were making on it into the payment for the next smallest debt, which helps to build momentum and motivation.

Here is a summary of the process:

1. Make a list of your debts, ordered from smallest to largest, regardless of their interest rates.
2. Pay the minimum amount required on all of your debts, except for the smallest one.
3. Put as much money as you can towards paying off the smallest debt.
4. Repeat this process until all of your debts are fully paid off.

Positives:

The debt snowball method is effective because it focuses on changing your financial habits and behavior, rather than relying on advanced math or business knowledge. In fact, the key to achieving financial success is often more about changing your behavior than about understanding complex financial concepts.

By modifying your financial habits, you can make significant progress toward paying off your debts and improving your financial situation. So, if you can motivate yourself to make positive changes in your financial behavior, you will be well on your way to achieving your financial goals. Remember that winning with money is largely about changing your habits, rather than relying on your knowledge alone.

Negatives:

The debt snowball method is not the most mathematically efficient way to pay off debt.

Want faster results? Schedule a free quick Q&A call now.

2. Avalanche Method

The debt avalanche method is a debt repayment strategy that involves paying off the debt with the highest interest rate first while making the minimum payments on the other debts. By focusing on the debt with the highest interest rate, you can save the most money on interest payments in the long run.

Here’s how it works:

1. Make a list of all your debts, including the interest rates and minimum payments required for each one.
2. Pay the minimum amount required on all of your debts.
3. Use any additional money you have available for debt repayment to pay off the debt with the highest interest rate.
4. Repeat this process until all of your debts are paid in full.

Positives:

Save money on interest payments by focusing on the debt with the highest interest rate first.

Get out of debt more quickly by paying off the debts with the highest interest rates first.

If you are someone who is organized and budget-conscious, the debt avalanche method may be a good fit for you as it requires careful planning and management of your debts.

Negatives:

To make this method work, you need to have a constant source of discretionary income that you can use to make these payments. This may involve making sacrifices or cutting back on certain expenses in order to free up money for debt repayment. Implementing the debt avalanche method requires a long-term commitment and a dedicated effort to pay off your debts as quickly as possible.

Want faster results? Schedule a free quick Q&A call now.

3. Cash Flow Index Method

The Cash Flow Index (CFI) is a tool that helps you determine the most effective way to pay off your loans. It assigns a score to each of your loans based on their efficiency and helps you identify which ones should be paid off first. By prioritizing the repayment of the most inefficient loans first, and then organizing the repayment of the remaining loans in a way that maximizes your results, the CFI can help you make the most progress toward becoming debt-free.

Cash Flow Index = Loan Balance / Minimum Monthly Payment

Here Is An Example
Let’s say you have the following loans:

Home Loan Balance: $350,000
Interest Rate: 4.5%
Monthly Payment: $2,000
Cash Flow Index: 175 ($350,000 ÷ $2,000)

Auto Loan Balance: $20,000
Interest Rate: 6%
Monthly Payment: $500
Cash Flow Index: 40 ($20,000 ÷ $500)

Credit Card Balance: $9,000
Interest Rate: 18%
Monthly Payment: $250
Cash Flow Index: 36 ($9,000 ÷ $250)

Student Loan: $50,000
Interest Rate: 2.5%
Monthly Payment: $500
Cash Flow Index: 100 ($50,000 ÷ $500)

Investment property loan balance: $75,000
Interest Rate: 3.5%
Monthly Payment: $2,500
Cash Flow Index: 30 ($75,000 ÷ $2,500)

It is common to prioritize paying off debts with the highest interest rates first.

However, using the Cash Flow Index (CFI) may lead to more efficient debt repayment.

Paying off the loan with the lowest CFI first can free up more cash flow to put towards other debts, creating a “snowball” effect. In the example provided, focusing on the investment property (CFI of 30) first frees up more cash flow than starting with the credit card, and allows for faster repayment of other debts.

Here’s how it works:

1. Calculate the Cash Flow Index (CFI) for all of your loans.
2. Pay off the loan with the lowest CFI score first, while making the minimum required payments on your other loans and redirecting any extra funds toward the one with the lowest CFI.
3. Rank the remaining loans in order from lowest to highest CFI score.
4. Celebrate your debt-reduction victories and reward yourself by setting aside a percentage of your newly freed-up cash flow into a “treat yourself” account.

Positives:

The Cash Flow Index (CFI) takes into account not only the interest rate and balance of a loan but also the monthly payments and their impact on your cash flow.

Frees up more cash flow to put towards other debts, leading to faster overall debt repayment.

The CFI may also help a borrower identify loans that may be inefficient and in need of restructuring.

Negatives:

The method may not be straightforward, but with proper organization of your loans and careful calculations, you can achieve the best results.

Want faster results? Schedule a free quick Q&A call now.

4. Bonus: Emotional Baggage Method

The Emotional Baggage method involves prioritizing the repayment of debts that are emotionally difficult or burdensome, regardless of the interest rate or amount owed. This may include personal loans that have caused problems or payments made to attorneys following a difficult divorce. Paying off these emotionally toxic debts first can provide a sense of relief and allow you to move on with your financial life. This method might be best if used in combo with one of the other three methods.