Key takeaways

  • Paying off debt requires prioritizing which accounts you pay the most to.
  • A budget is the most critical part of any debt payoff strategy.
  • Reducing bills, adding income and finding professional help will improve your progress.

The average American has $96,371 in debt. And while this amount does include some necessary debt, like mortgages and auto loans, it also includes credit card balances, student loans and personal loans.

If you’re struggling to make a dent in your outstanding balances and stay afloat financially, there are options to help you find relief. Using strategies like the debt snowball, avalanche or debt consolidation will bring you closer to becoming debt free.

Strategies for paying off debt

Regardless of how you got into debt, you need a plan to pay it off. Commit to a budget and don’t be discouraged by setbacks. Remember, slow and steady wins the race toward a zero balance.

The debt snowball

The debt snowball method builds momentum as you repay creditors, like rolling a snowball across the ground. Begin by paying off debts from smallest to largest. List debts by balance and start with the smallest one. Make sure to pay the minimums on all other bills and send extra cash to the debt with the smallest balance until it’s paid in full.

Repeat this strategy with the other debts. As you pay off balances, you’ll free up more funds for other debts. Plus, it can be encouraging to see progress quickly as you close your accounts. Just be aware that this is not the most efficient method if you want to save money on interest.

  • Who this is best for: The debt snowball is best if you want to experience quick gains when paying off your debts.

The debt avalanche

The debt avalanche strategy takes a similar approach but instead orders debts by interest rate. First, you make a list of all your debts from the highest interest rate to the lowest.

You then concentrate on paying off the highest-interest debt first while making minimum payments on all other accounts. This cuts back on the amount you pay in interest, which also frees up more cash to pay down other debt. Closing accounts takes more time, but you may pay less in interest than with the debt snowball.

  • Who this is best for: The debt avalanche is suitable if saving money in interest is a priority, and you’re motivated to get out of debt quickly.

Debt consolidation

If it becomes too challenging to keep up with various payments and due dates, consider debt consolidation. This approach allows you to roll all your debts into one account, either through a personal loan or a new balance-transfer credit card.

While the new interest rate may be higher than some of your other bills, you could wind up saving money by avoiding missed and late payment fees. Provided the average interest rate is lower with debt consolidation, you should save money — even if your monthly payments are slightly higher. A debt consolidation calculator is useful for ensuring you save money.

  • Who this is best for: Consider debt consolidation if you can commit to not using your credit cards or acquiring more debt while you work to pay off what you owe.

Debt management plan

Nonprofit credit counseling agencies can help set up a debt management plan with debtors. An agency will negotiate concessions on your behalf with the companies that you owe money. This could entail arranging for lower payments, setting up reasonable repayment plans and possibly securing debt forgiveness.

  • Who this is best for: Debt consolidation could be a viable option if you struggle to keep up with your minimum monthly payments and prefer a plan that can help you pay less in interest.

Tips for paying off debt

Once you have a debt payoff plan in place, these tips can help you stay on track.

1. Stick to a budget

Whatever strategy you choose for paying off debt, you’ll need a budget. Otherwise, it’s easy to get off track. With a budget, you see where each dollar is going, which will help you identify areas where you could cut costs and save money.

Whether you use an app or a spreadsheet to create a budget, once you see all your income and expenses laid out, you can start planning for how to pay off debt. Subtract your fixed expenses from your income — that’s your free cash flow. That money is what you have available to cover other bills and your debt.

2. Start an emergency savings account

Life will continue to happen while you’re focused on paying off your debt, which is why you need an emergency savings account. As much as you may want to put every extra penny toward your credit card balance, if you’ve paid off half your balance but then can’t pay for an emergency, you’d just have to charge it again.

Most experts advise having three to six months’ worth of living expenses in savings, so when you’re putting your budget together, it should include a line item for savings. This may not be possible at first, but as you pay off smaller accounts, you can start putting that money toward your savings.

3. Reduce monthly bills

If you’re wondering how to pay off debt and save, consider ways to reduce monthly bills. Lowering monthly expenses frees up money that can be put toward paying down debt.

Are there any unnecessary expenses that can be cut? Maybe drop Netflix or cable for a few months to save money and free up time for a side hustle. If the heating bills have been out of control, many utility companies offer free energy audits, which would identify changes you could make to curb utility costs.

There are also government and community resources that can be used if you’re experiencing financial strain. Look into options in your area. Even a small reduction to your bills can provide relief.

4. Earn extra cash

A side hustle or second job may be an unfortunate necessity if you have significant debt. If you have hobbies or skills you can monetize, start there. If not, you can try to pick up extra shifts at work or start doing jobs for the gig economy.

Any extra money you are able to earn can go toward your debt as you pay it off. Once you’ve made some headway, you can also use your secondary income to build up your savings as well.

5. Explore debt relief options

When you sign up to work with a debt relief company, it negotiates with your creditors to settle or attempt to change the terms of your debt. But there is a catch.

Debt relief companies charge fees for their services. To increase a creditor’s willingness to negotiate, the company may urge clients to stop making payments on their bills. This will lead to late fees, interest charges and other penalties that increase debt and hurt credit scores.

While a debt relief company can help settle or manage some bills, they could ultimately do more harm than good. Explore all other options before deciding to work with one.

Bottom line

There are many strategies and options for paying off your debts. Research the different approaches to find a tactic that is likely to work best for you.

Once you get started, establish a budget and an emergency savings account to help ensure your debt doesn’t grow out of control once again.

Frequently asked questions

  • While there’s certainly no requirement that you use a debt payoff strategy, one of these approaches can help you attack your debt more effectively and pay it down more quickly.
  • The best strategy will depend on your debt and financial habits. For some people, the debt snowball may work more effectively. For others, the avalanche approach or a debt consolidation loan may be more effective.

    The key is to investigate each option, consider your circumstances and select an approach that is likely to work best for you. And there’s nothing wrong with switching from one to the other if you find something isn’t working.
  • A debt consolidation loan may be worth it if you have a lot of different debts and are having trouble keeping track of all of your bills each month. Streamlining your debts in one loan can also give you a specific repayment timeline. But it’s also important to consider the fees and interest rate associated with a consolidation loan.

    Crunch the numbers and compare the interest rate on the consolidation loan to what you’re currently paying on your debts to make sure you will truly save money.