Being in debt is never a fun feeling. Yet if you're struggling with it, you aren't alone: Equifax Canada reported that Canadian debt was up 2.7% from 2018 to 2019 Opens in a new window..
If you're searching for an effective repayment method, look no further. Here are 3 simple strategies to help you achieve debt freedom.
Things to consider when choosing a debt repayment strategy
When you're picking a debt repayment strategy, it's important to consider your level of motivation and stick-to-itiveness in regards to your finances.
Are you someone who needs to see quick results in order to keep going? Or, are you able to keep your eye on the big picture and stick to your plan for the long-haul?
The answers to these questions are important and will drive you toward the debt repayment strategy that best suits your needs.
3 simple debt repayment strategies
1. Debt snowball strategy:
To use this method, simply review your debts and put them in order from lowest to highest. Don't worry about which debt has the highest interest rate. For example:
| Debt |
Balance |
Interest |
| Credit Card 1 |
$500 |
18% |
| Student Loan |
$1,500 |
5% |
| Credit Card 2 |
$2,500 |
28% |
The next step is to make the minimum payments across all of your debts to prevent any penalties. Then, you'll want to put any additional money you have toward paying off your smallest debt which is the $500 credit card balance in the above chart. Once that's paid off, you move on to the next one which is the $1,500 student loan.
Why it works
From a mathematical perspective, this strategy is not necessarily the most optimal way to approach your debt. However, for many people, this is the strategy that helps them stick to their debt repayment plan.
One way that humans deal with large goals like debt repayment is to break them up into smaller, more manageable pieces. When you take on a manageable piece and succeed, it feels great. By knocking off that first chunk of debt, you feel like, "Yeah, I've got this." When it comes to subsequent payments, you'll have that motivation to throw behind them.
If you're more concerned with trying to maintain the momentum needed to succeed in debt repayment as opposed to optimizing the process, this might be the strategy for you.
2. Debt avalanche strategy:
The "debt stacking" strategy requires you to review your debts and then put them in order based on interest rate from highest to lowest.
| Debt |
Balance |
Interest |
| Credit Card 2 |
$2,500 |
28% |
| Credit Card 1 |
$500 |
18% |
| Student Loan |
$1,500 |
5% |
The goal is to optimize your debt repayment by paying the least amount of interest in the shortest time frame possible.
To start, make the minimum payments on all of your debts. Next, put all of your extra money toward the debt with the highest interest being the $2,500 credit card in the chart above. Once that's paid off, you move on to the next item which is in this case, the $500 credit card.
Why it works
Based on numbers alone, this strategy may be the most effective method of debt repayment. For some, knowing that you're choosing the most optimal path is all the motivation necessary. As a result, this strategy works best for those who are ultra-logical and able to stay the course without a quick win.
However, some people struggle with this method because it can take a long time to achieve your first complete debt repayment. Without a quick win, it can feel like you're not making progress fast enough, which some may find demoralizing.
3. Debt blizzard strategy
If you're having a hard time choosing between the first two strategies, don't worry — you can have both.
The third debt repayment strategy is a combo of the quick win and debt stacking approaches. Start by paying off your smallest debt using the snowball method, and then switch to the avalanche strategy.
| Debt |
Balance |
Interest |
| Credit Card 1 |
$500 |
18% |
| Credit Card 2 |
$2,500 |
28% |
| Student Loan |
$1,500 |
5% |
Why it works
This strategy gives you the best of both worlds. You get the rush of accomplishment and motivation from an early win, and then you can implement the debt stacking method to optimize the rest of your repayment journey.
Which strategy is "right" for you?
While the debt avalanche strategy might seem like the "right" choice if you're simply looking at the numbers, it's not necessarily the strategy that will work best for everyone.
If you know that your psyche will benefit from a win early on in your debt repayment journey, try out the first method. If you're looking for the most efficient strategy and you don't need the extra motivation, try the second. If you simply can't make up your mind, go for the combo.
When it comes to your debt repayment journey, try not to get hung up on which method is “best." Each of these strategies have effectively helped people achieve their debt repayment goals. The right method for you is simply the one that you think you can stick to.
