If you have debt, you’re not alone. The average American carries more than $100,000 in debt.1 That existing debt load means unexpected expenses such as medical bills can be a tipping point into financial insecurity.2And if you have too many payments every month, you might get behind on other financial goals such as building an emergency fund, taking a vacation, or adding to a retirement account.
One place to start? Try to make progress every month on reducing your debt. It takes a little organization up front, plus a strategy that fits your budget and your preferences. These steps can help—including three specific, practical strategies to pay down or pay off your debt:
Make a list of all your debt.
Before you start paying off debt, tally how much debt you have. Make a list with this information for each bill you owe.
Trim from “wants” and a little from “needs” (i.e., a lower streaming bill) to come up with the total you can put toward debt repayment each month.
What’s the best way to pay off debt?
You can choose a debt repayment plan tailored to your unique circ*mstances— what’s best for you. In general, there are three strategies that can help you pay down or pay off your debt more efficiently.
What it’s called
How it works
How you keep it going
Why some people like it
1. The snowball method
Pay the smallest debt as fast as possible. Pay minimums on all other debt.
Then pay that extra toward the next largest debt.
A quick payoff is a quick win and can be a confidence booster.
2. Debt avalanche
Pay the largest or highest interest rate debt as fast as possible. Pay minimums on all other debt.
Then pay that extra toward the next smallest debt.
Paying off a big debt can boost a feeling of control and gets rid of big interest, too.
3. Debt consolidation
Combine debts into a single account.
Avoid any other debt until post-payoff
Possible lower interest and one account increases focus.
Celebrate success and stay on top of future debt.
Sometimes debt can be good to help you build a credit score or accomplish goals—such as buying a house—that would be hard to do without a loan. But lots of extra debt can weigh down your credit score and add up to interest you didn’t want to pay. So celebrate every extra payment—and every debt payoff, too.
What's next?
As you manage your debt, talk to a financial professional about your long-term retirement savings strategy. If don’t already have a financial professional, we can help you find one.
This involves starting with your smallest balance first, paying that off and then rolling that same payment towards the next smallest balance as you work your way up to the largest balance. This method can help you build momentum as each balance is paid off.
This strategy, also called the snowball method, prioritizes your debt payments from smallest to largest. You'll continue to pay the minimum on all of your debts while focusing the majority of your repayment efforts on your debt with the smallest balance.
Make minimum monthly payments on all debt, except for the highest interest rate. Pay extra towards the debt with the highest interest rate. Once you have paid off debt with the highest interest rates, start paying more on the next highest interest rate.
This includes mortgages, home equity revolving debt, auto loans, credit cards, student loans and other consumer lending such as retail cards. The total household debt of $17.3 trillion entering 2024 is a new high for the U.S.
The "snowball method," simply put, means paying off the smallest of all your loans as quickly as possible. Once that debt is paid, you take the money you were putting toward that payment and roll it onto the next-smallest debt owed. Ideally, this process would continue until all accounts are paid off.
After the debt with the highest rate is paid off, you focus on paying off the one with the next highest interest rate, and continue until all your debts have been paid off. Another method is called the debt snowball, which focuses on paying off your smallest debt first.
The debt snowball method: paying your smallest debts first
Then, pay the minimum amount each month on all debts, but focus the majority of your efforts on that smallest account. Once your smallest debt has been repaid, move on to the next smallest debt and repeat the process.
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