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Pay Off Your Debt Slowly or All At Once: Which is Best?

Pay Off Your Debt Slowly or All At Once: Which is Best?

The question of if you should pay your debts slowly or if you should pay them all off in one go is usually redundant for most people. After all, if they had the money to pay off their debts in one go, they would probably do it and not look back. However, when you are creating a budget, you often have to ask yourself how quickly you should pay off your debts in a way that balances your way of life and quality of life, with your future financial goals and debt repayment plans. You should also consider the manner in which you should pay them off, such as in frequent intervals, sporadically, or simply when you have the money in hand.

How quickly you pay off your debts may drastically affect your future finances and wealth building efforts. Mismanagement of your debt may lead to a negative feedback loop where you are stuck in debt indefinitely. This article covers a few ways that you may pull yourself out of debt. Consider which would work the best for you.

The Snowball Method Is A Darn Fine Method

The Snowball method is used for paying off numerous debts. You pay off one and then put the money from that onto another, and put the money from that onto another. If done correctly, then the rate at which you pay off you debt should increase over time.

a pile of snowballs that refer to debt in some way

How To Use The Snowball Method

Let’s say you have a loan at $1500, and another personal loan at $4500, and a credit card at $3500, and another credit card at $2750. You have to pay a set amount for each every month. The snowball method has you pay a bit extra onto one of them, and when that is paid off, you pay even more onto another. You should always start with the lowest debt, so here is how it may go:

  • Loan at $1500 and pay $127 per month
  • Credit card at $2750 and pay $80 per month
  • Credit card at $3500 and pay $90 per month
  • Personal loan at $4500 and pay $166 per month

The snowballer should pay a little extra to the one with the lowest amount, so it would go:

  • Loan at $1500 and pay $127 per month + $50
  • Credit card at $2750 and pay $80 per month
  • Credit card at $3500 and pay $90 per month
  • Personal loan at $4500 and pay $166 per month

When the first loan of $1500 is paid off, the $127 and the $50 goes onto the next lowest debt, so it would look like this:

  • Credit card at $2750 and pay $80 per month + $127 + $50
  • Credit card at $3500 and pay $90 per month
  • Personal loan at $4500 and pay $166 per month

The credit card is then paid off far quicker than it would have been if the previous loan were still on the scene. The second credit card is paid off quicker, and when it is paid off, the money is moved down again. Also, don’t forget that the quicker you pay, then the less interest you pay.

  • Credit card at $3500 and pay $90 per month + $80 + $127 + $50
  • Personal loan at $4500 and pay $166 per month

Due to the higher amount of $347 being paid per month onto the credit card, it is paid off rather quickly compared to how quickly it was being paid off when it was only receiving $90 per month. When that credit card is paid off, it only leaves the personal loan.

  • Personal loan at $4500 and pay $166 per month +$90 + $80 + $127 + $50

At this point the debt is almost paid. Not only is the personal loan having a total of $513 paid into it per month, the loan has already received numerous payments of $166 while the other debts were being paid off, so the debt will be lower than $4500 by this stage.

One Problem With The Snowball Method

One problem with the system is that few people are able to manage it. Usually, they will pay the minimum repayment amounts for each debt, and when one is paid off, it is usually more of an isolated incident rather than the result of prudent financial planning. People will pay the minimum amounts and when one is paid off, they will not put the old debt’s payments into their existing debts.

Another Problem With The Snowball Method

When people have paid off one debt, they start to like the bit of extra cash in their pockets, so they do not apply the money to their other debts. People who have numerous debts are often very tired of having debt and they are very tired of having no money. When they have paid off a debt, even a small one, they dislike debt so much that they wish to enjoy themselves and celebrate the fact that the debt has gone. They enjoy the money, and when next month comes around, they do not budget to put the money back into their debt. Instead, they simply spend the money as if it were new income.

Pros

  • The longer you do it, the faster your debts are paid off
  • It is easy and it doesn’t take extra effort
  • The more you put in, the faster it works

Cons

  • It takes a lot of self-discipline to do it
  • The starting stages are slow and show little progress
  • It is very easy to spend rather than re-invest

Money being counted out in piles

Slow Repayments And Invest

If you have a set amount on your budget and your debts are slowly being paid off, then you may decide not to push your deadline. You may decide that your debts are being paid off at a reasonable rate and that may be enough for you. If that is the case, you may have disposable income floating around. Under other circumstances, you would put it into your debt, but since you are happy with your repayment rate and frequency, you may like to invest your disposable income instead.

Putting Your Money Elsewhere

Let’s say that you pay $400 in debt payments per month, and you get a pay raise at work that leaves you with an extra $350 per month. You may be willing to invest that money into your debt under normal circumstances, but you have already decided that your debt is being paid off at a reasonable rate. Instead of spending the money frivolously, you decide to save the money instead.

Each month, you put $400 onto your debt and $350 into government bonds. At the end of the year, you have paid $4800 into your debt and $4200 into government bonds. In three years, your $4200 will be worth $4326.

What Is The Point?

Instead of putting the $350 into the debt accounts, you have put it into government bonds that mature after three years, giving you an extra $126 on top of your $4200.

The $4200 could have easily gone into the debt accounts to pay the debts off more quickly. The reason somebody may only pay a marginal amount is because that person sees debt as a bill and nothing more. The debt may take a long time to be paid off, but the person in debt has a nest egg to look forwards to when the debt is paid off.

Pros

  • You have something to start your nest egg at the end
  • Not all of your disposable income goes on debts
  • You can always put your nest egg on to your debts if you really want to

Cons

  • Paying off your debt first is the way you should go
  • You may not be able to hold on to your savings without spending them
  • You lose money on debt interest than you make on savings interest

 A smartphone spewing money

Faster Repayments By Putting It All On Your Debt

Unlike the scenario laid out above, you put all of your extra money into paying off your debt. If you truly wish to get your debt paid off faster, then you will put all of your disposable income into paying it off. For many people, this means cutting back and maybe earning more. In many cases, the faster you pay off your debt, then the less interest is earned.

In any case, getting rid of debt means improving how much disposable income a person has each month. It means removing an expense from the monthly budget, which frees up money to be invested in wealth building and/or personal indulgences.

Pros

  • Frees up your money, so you may invest it more wisely
  • Paying off your debt early may help you save on interest fees
  • It removes an expense from your monthly budget

Cons

  • Put your disposable money into debt and you do not have a safety cushion
  • You will have no nest egg to start your wealth building when the debt is repaid
  • Paying your debt off sooner rather than later may make no difference at all

How Good Are You At Saving?

There are some people who are terrible at saving and find it very difficult to get out of debt. These same people may then receive a lump sum in winnings, or more commonly, a lump sum due to inheritance. In their circumstances, a prudent investor and/or a person who is good with money would use the windfall to pay off the debt, but some people are bad at saving.

A common use for the windfall is as a deposit on a mortgage. The argument is that the people who had the windfall will never be able to afford a big wedding, and may never be able to afford a mortgage deposit. The argument is that such people should invest either in a big wedding or in the deposit needed to get a mortgage.

If you are good with money and saving

You should use the money to pay off your debt so that you may start building wealth and earning interest without losing money through debts.

If you are no good at saving

You should probably put the money into getting a new house. The cost of buying a house, including the deposit and associated fee is almost double what most people think it is. If you are sure you will never save a deposit for a house in the next ten years, then use your windfall as the down payment on a house.

If you are frequently out of work

If you or your partner work full-time, then this may not apply. If both of you have trouble keeping a job, then you shouldn’t take on a mortgage. You may both like to consider putting the money towards a wedding if you have always wanted a nice one.

Conclusion – Make Paying Off Your Debt A Priority

It is true that some sections of this article argue that paying off your debt as soon as possible is not necessary, and that is true, but the fact is that debt is soul destroying. It is a monthly expense that adds no value to your life. You should do all you can to remove debt from your life and keep it removed.

Paying your debt off faster is certainly a good idea if you are being charged interest. If you can save on interest by paying early, then even small amounts are good for your financial future. An extra dollar here and there may make a big difference (it will certainly make more difference than nothing will).

Even if it makes no difference when you pay off your debt, and even if paying off your debt early will not save you any interest, you should still pay it off as early as possible so that you may start wealth building and strategizing a little earlier. Building wealth and making yourself financially independent is not something you should put off, like you have been doing with your retirement savings, it is something that should be tackled today so that you have a brighter tomorrow.

About The Author

Ash The Great

After a varied career in different industries from the hospitality industry to the financial consultancy industry, Ash now spends his days working as a professional writer.

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