There are three main strategies for getting out of debt efficiently: Debt Stacking, Snowball, Constant Payment. For lack of a better term, I’m going to refer to them as Efficient Debt Payoff strategies. When compared with making minimum credit card payments, they all share three common factors:
1. They hold payments constant over time
2. They apply “extra” cash to one account to pay it off as quickly as possible
3. When one account is paid off, the extra payments roll over to the next account
Let’s take a look at each of these factors in turn.
Factor #1—Making Constant Payments:
Did you know if you only make the minimum payments on credit cards, you actually pay off less principal each month? It’s true. That’s why it can take 20-30 years to pay off a credit card. Let’s look at a simple example:
Credit card payments are usually determined as a percentage of the total balance—usually the monthly interest rate plus 1.0-1.5%. So for this example, let’s assume the monthly payment is 3.25% * balance. Because part of each payment is going to principal, the balance comes down each month. But notice that as a result, the payment and the amount applied to principal come down each month as well. In fact, by month 12 the principal payment has dropped by nearly 13%. You’re paying off less debt each month, dragging the debt payoff on and on for 270 months. That’s 22.5 years, over which you pay $15,365 in interest.
Here’s what your payments look like if you only pay the minimum.
What would happen if you held the payment constant at the starting amount of $325?
First thing to notice is that the balance is coming down. That’s not surprising, since it did under minimum payments as well. But the important thing to notice is that because you pay off some principal in each period, your interest payment is lower in the next period. If you’re holding your total payment constant, that means your payment to principal actually increases each month.
The difference is pretty dramatic: in month 12, your principal payment is $46 more than if you make only minimum payments. And that “extra” principal adds up over the months. Notice that after only 12 months, you’ve paid off $270 more just by holding your payment constant.
$270, doesn’t sound very impressive, but you’re just getting started. Each month that builds up. Let’s just look at the payment graph and you’ll see what I mean:
The constant payment line holds constant at the starting amount of $325 and drops off at 49 months because the debt is paid off. Total time in debt: 4 years, 1 month. Total interest expense: $5,682. That’s nearly $10,000 less in interest. Wow!
This factor holds true if you have more than one account: you just hold the total amount constant at something equal to or greater than the sum of the minimum payments. In fact, having multiple accounts actually makes it possible to get out of debt more quickly, as we’ll see.
Factor #2: Apply extra cash to one account to pay it off as quickly as possible.
The fact that minimum payments decline every month while you hold the total payment constant creates “extra” cash that you don’t really have to pay. It’s simply the difference between your constant payment amount and the required minimum payments. This “extra” cash provides an opportunity to pay off debt even more efficiently.
Let’s say that now you have two accounts instead of just one, one at 24% and the other at 15%. Because you’re holding your total payment account constant over time, while the minimum payments are declining, you’re actually generating a large amount of “extra” cash. What are you going to do with it? There are 3 basic ways you could use the cash:
1. Pay off the highest-APR account as quickly as you can. This is called Debt Stacking and it’s the most efficient.
2. Pay off the lowest balance account as quickly as possible. This is called the Snowball, often associated with Dave Ramsey. Many people believe that it keeps you motivated because it lets you pay off an account most quickly and feel that sense of accomplishment.
3. Keep the payments on each account constant. This isn’t really as efficient as debt stacking, but it lets you set and forget the payments for each account.
Let’s take a look at debt stacking and compare it to what would happen if we just held the payments constant for each account. We mentioned that with a debt stacking approach, you take the extra cash the low-APR account and apply it to the high-APR account. In this case, we’ll only pay the minimum in the 15% account ant put everything we can to the 24% account.
So what’s that get you? Let’s compare it to the constant payment method.
Paying off the highest-APR account first saves $500 in interest and pays off debt 5 months sooner. Both Debt Stacking and Snowball are “efficient” in the sense that they take the “extra” cash from all the accounts and put it toward one single account to pay it off as quickly as possible.
Factor #3: Rollover extra cash after an account is paid off.
This one’s not rocket science, but it’s powerful if you think about it. If you start with an amount and you’re able to keep that total constant as you pay off accounts, you’re going to churn through them quickly because you’re freeing up more and more cash. The rollover just follows the same direction as the strategy you choose: if debt stacking, roll it to the net highest APR account; if snowball, roll it to the next lowest balance.
Even though this sounds very basic, it’s where most people make mistakes. They pay off their first account and take the foot off the gas just when they’re starting to get momentum.
We’ve seen how these three factors combine to really help you turbo charge your debt repayment. Regardless of the strategy you choose, you’ll be much better off than paying minimums, so pick the strategy that feels like it will work best for you and throw yourself behind it…you’ll be out of debt before you know it.
Why Efficient Debt Payoff is more efficient than making minimum payments
There are three main strategies (Debt Stacking, Snowball, Constant Payment) for getting out of debt efficiently and for lack of a better term, I’m going to refer to them as Efficient Debt Payoff strategies. When compared with making minimum credit card payments, they all share three common factors:
1. They hold payments constant over time
2. They apply “extra” cash to one account to pay it off as quickly as possible
3. When one account is paid off, the extra payments roll over to the next account
Let’s take a look at each of these factors in turn.
Factor #1—Making Constant Payments:
Did you know if you only make the minimum payments on credit cards, you actually pay off less principal each month? It’s true. That’s why it can take 20-30 years to pay off a credit card. Let’s look at a simple example:
Credit card payments are usually determined as a percentage of the total balance—usually the monthly interest rate plus 1.0-1.5%. So for this example, let’s assume the monthly payment is 3.25% * balance. Because part of each payment is going to principal, the balance comes down each month. But notice that as a result, the payment and the amount applied to principal come down each month as well. In fact, by month 12 the principal payment has dropped by nearly 13%. You’re paying off less debt each month, dragging the debt payoff on and on for 270 months. That’s 22.5 years, over which you pay $15,365 in interest.
Here’s what your payments look like if you only pay the minimum.
What would happen if you held the payment constant at the starting amount of $325?
First thing to notice is that the balance is coming down. That’s not surprising, since it did under minimum payments as well. But the important thing to notice is that because you pay off some principal in each period, your interest payment is lower in the next period. If you’re holding your total payment constant, that means your payment to principal actually increases each month.
The difference is pretty dramatic: in month 12, your principal payment is $46 more than if you make only minimum payments. And that “extra” principal adds up over the months. Notice that after only 12 months, you’ve paid off $270 more just by holding your payment constant.
$270, doesn’t sound very impressive, but you’re just getting started. Each month that builds up. Let’s just look at the payment graph and you’ll see what I mean:
The constant payment line holds constant at the starting amount of $325 and drops off at 49 months because the debt is paid off. Total time in debt: 4 years, 1 month. Total interest expense: $5,682. That’s nearly $10,000 less in interest. Wow!
This factor holds true if you have more than one account: you just hold the total amount constant at something equal to or greater than the sum of the minimum payments. In fact, having multiple accounts actually makes it possible to get out of debt more quickly, as we’ll see.
Factor #2: Apply extra cash to one account to pay it off as quickly as possible.
The fact that minimum payments decline every month while you hold the total payment constant creates “extra” cash that you don’t really have to pay. It’s simply the difference between your constant payment amount and the required minimum payments. This “extra” cash provides an opportunity to pay off debt even more efficiently.
Let’s say that now you have two accounts instead of just one, one at 24% and the other at 15%. Because you’re holding your total payment account constant over time, while the minimum payments are declining, you’re actually generating a large amount of “extra” cash. What are you going to do with it? There are 3 basic ways you could use the cash:
1. Pay off the highest-APR account as quickly as you can. This is called Debt Stacking and it’s the most efficient.
2. Pay off the lowest balance account as quickly as possible. This is called the Snowball, often associated with Dave Ramsey. Many people believe that it keeps you motivated because it lets you pay off an account most quickly and feel that sense of accomplishment.
3. Keep the payments on each account constant. This isn’t really as efficient as debt stacking, but it lets you set and forget the payments for each account.
Let’s take a look at debt stacking and compare it to what would happen if we just held the payments constant for each account. We mentioned that with a debt stacking approach, you take the extra cash the low-APR account and apply it to the high-APR account. In this case, we’ll only pay the minimum in the 15% account ant put everything we can to the 24% account.
So what’s that get you? Let’s compare it to the constant payment method.
Paying off the highest-APR account first saves $500 in interest and pays off debt 5 months sooner. Both Debt Stacking and Snowball are “efficient” in the sense that they take the “extra” cash from all the accounts and put it toward one single account to pay it off as quickly as possible.
Factor #3: Rollover extra cash after an account is paid off.
This one’s not rocket science, but it’s powerful if you think about it. If you start with an amount and you’re able to keep that total constant
Why Efficient Debt Payoff is more efficient than making minimum payments
There are three main strategies (Debt Stacking, Snowball, Constant Payment) for getting out of debt efficiently and for lack of a better term, I’m going to refer to them as Efficient Debt Payoff strategies. When compared with making minimum credit card payments, they all share three common factors:
1. They hold payments constant over time
2. They apply “extra” cash to one account to pay it off as quickly as possible
3. When one account is paid off, the extra payments roll over to the next account
Let’s take a look at each of these factors in turn.
Factor #1—Making Constant Payments:
Did you know if you only make the minimum payments on credit cards, you actually pay off less principal each month? It’s true. That’s why it can take 20-30 years to pay off a credit card. Let’s look at a simple example:
Credit card payments are usually determined as a percentage of the total balance—usually the monthly interest rate plus 1.0-1.5%. So for this example, let’s assume the monthly payment is 3.25% * balance. Because part of each payment is going to principal, the balance comes down each month. But notice that as a result, the payment and the amount applied to principal come down each month as well. In fact, by month 12 the principal payment has dropped by nearly 13%. You’re paying off less debt each month, dragging the debt payoff on and on for 270 months. That’s 22.5 years, over which you pay $15,365 in interest.
Here’s what your payments look like if you only pay the minimum.
What would happen if you held the payment constant at the starting amount of $325?
First thing to notice is that the balance is coming down. That’s not surprising, since it did under minimum payments as well. But the important thing to notice is that because you pay off some principal in each period, your interest payment is lower in the next period. If you’re holding your total payment constant, that means your payment to principal actually increases each month.
The difference is pretty dramatic: in month 12, your principal payment is $46 more than if you make only minimum payments. And that “extra” principal adds up over the months. Notice that after only 12 months, you’ve paid off $270 more just by holding your payment constant.
$270, doesn’t sound very impressive, but you’re just getting started. Each month that builds up. Let’s just look at the payment graph and you’ll see what I mean:
The constant payment line holds constant at the starting amount of $325 and drops off at 49 months because the debt is paid off. Total time in debt: 4 years, 1 month. Total interest expense: $5,682. That’s nearly $10,000 less in interest. Wow!
This factor holds true if you have more than one account: you just hold the total amount constant at something equal to or greater than the sum of the minimum payments. In fact, having multiple accounts actually makes it possible to get out of debt more quickly, as we’ll see.
Factor #2: Apply extra cash to one account to pay it off as quickly as possible.
The fact that minimum payments decline every month while you hold the total payment constant creates “extra” cash that you don’t really have to pay. It’s simply the difference between your constant payment amount and the required minimum payments. This “extra” cash provides an opportunity to pay off debt even more efficiently.
Let’s say that now you have two accounts instead of just one, one at 24% and the other at 15%. Because you’re holding your total payment account constant over time, while the minimum payments are declining, you’re actually generating a large amount of “extra” cash. What are you going to do with it? There are 3 basic ways you could use the cash:
1. Pay off the highest-APR account as quickly as you can. This is called Debt Stacking and it’s the most efficient.
2. Pay off the lowest balance account as quickly as possible. This is called the Snowball, often associated with Dave Ramsey. Many people believe that it keeps you motivated because it lets you pay off an account most quickly and feel that sense of accomplishment.
3. Keep the payments on each account constant. This isn’t really as efficient as debt stacking, but it lets you set and forget the payments for each account.
Let’s take a look at debt stacking and compare it to what would happen if we just held the payments constant for each account. We mentioned that with a debt stacking approach, you take the extra cash the low-APR account and apply it to the high-APR account. In this case, we’ll only pay the minimum in the 15% account ant put everything we can to the 24% account.
So what’s that get you? Let’s compare it to the constant payment method.
Paying off the highest-APR account first saves $500 in interest and pays off debt 5 months sooner. Both Debt Stacking and Snowball are “efficient” in the sense that they take the “extra” cash from all the accounts and put it toward one single account to pay it off as quickly as possible.
Factor #3: Rollover extra cash after an account is paid off.
This one’s not rocket science, but it’s powerful if you think about it. If you start with an amount and you’re able to keep that total constant as you pay off accounts, you’re going to churn through them quickly because you’re freeing up more and more cash. The rollover just follows the same direction as the strategy you choose: if debt stacking, roll it to the net highest APR account; if snowball, roll it to the next lowest balance.
Even though this sounds very basic, it’s where most people make mistakes. They pay off their first account and take the foot off the gas just when they’re starting to get momentum.
We’ve seen how these three factors combine to really help you turbo charge your debt repayment. Regardless of the strategy you choose, you’ll be much better off than paying minimums, so pick the strategy that feels like it will work best for you and throw yourself behind it…you’ll be out of debt before you know it.
as you pay off accounts, you’re going to churn through them quickly because you’re freeing up more and more cash. The rollover just follows the same direction as the strategy you choose: if debt stacking, roll it to the net highest APR account; if snowball, roll it to the next lowest balance.
Even though this sounds very basic, it’s where most people make mistakes. They pay off their first account and take the foot off the gas just when they’re starting to get momentum.
We’ve seen how these three factors combine to really help you turbo charge your debt repayment. Regardless of the strategy you choose, you’ll be much better off than paying minimums, so pick the strategy that feels like it will work best for you and throw yourself behind it…you’ll be out of debt before you know it.
Planning to pay taxes with your credit card? Stop! Immediately!
