Empower Your Financial Future: 4 Strategies for Paying Off Consumer Debt
- Jeannette Fennel
- Dec 27, 2024
- 6 min read
Updated: Jan 17
“Jeannette, what order do I pay off my debt?”
I’ve been hearing this question a lot lately.
Probably because January is approaching and people are creating New Year’s Resolutions.
People are also seeing their last paychecks for 2024 and wondering where all their money has gone.
Maybe people are just plain tired of feeling like they can’t get ahead.
Whatever the reason, I applaud these brave people for asking that question. 👏👏👏
Digging yourself out of debt isn’t easy. It takes grit, determination, and can be uncomfortable at times. Having a system or method to follow is helpful to reach your goal of financial freedom.
In this blog post, I share four effective methods to pay off consumer debt: Snowball, Avalanche, Lump Sum, and Pissed Off.
Before I get too excited, I want to define a couple things...
Consumer Debt - When I talk about consumer debt, I’m talking about ANY money you owe besides your mortgage. This can include credit cards, student loans, personal loans, money owed to family members, auto loans, HELOCs, payday loans, and medical bills. To put it simply: if you owe someone money (not including your mortgage), I lump it into your consumer debt.
Emergency Fund - Let’s be honest, 💩 happens. You can’t control when an emergency will pop up. An emergency fund is money you set aside only for emergencies. So when your dog unexpectedly needs to go to the vet, you can swipe your debit card and not your credit card. If you’re following the 7 Baby Steps, they recommend having $1,000 in your emergency fund when you’re paying off consumer debt. Personally, I ran it fatter and had about $3,000 in my emergency fund (it helped me sleep better at night). Regardless of how much you set aside, you need an emergency fund to help break the cycle always grabbing your credit card in emergencies.
Okay… now that that’s out of the way, let’s get to the good stuff!
Meet Jack. He is a fictitious person I created as an example. Jack is 38 and tired of making payments on everything. He wants to start investing for his retirement and has decided to eliminate his consumer debt (yay Jack!). He has set money aside for his emergency fund and is now ready to pay off his debt.
Here is a list of Jack’s debts, amounts he owes, and interest on each thing:
Student Loans - $6,000 - 6%
Auto Loan - $25,000 - 9%
Boat Loan - $10,000 - 10%
Credit Card #1 - $2,000 - 22%
Credit Card #2 - $5,000 - 24%
Credit Card #3 - $500 - 32%
Money Owed to Uncle - $700 - 0%
Let’s discuss each method, the pros/cons, and how Jack would pay off his debt.
Snowball
With the Snowball method, you list your debts from the smallest to largest amounts and ignore the interest rates. You pay the minimum for each debt every month, but you attack the smallest debt until it is paid off. Once it is paid off, you roll that amount into the next loan on your list. You keep doing this until all of your consumer debt is paid off.
Pros - With paying off debts from smallest to largest and eliminating monthly payments, it allows people to have early wins and feel like they’re making progress.
Cons - Since you aren’t considering interest rates, you spend more money over time.
The order Jack would pay off his debts with the Snowball method:
This is how the hubs and I paid off our consumer debt. We definitely had some quick wins paying off smaller debts first and kept us motivated on challenging days. I typically recommend this method to clients. Dave Ramsey also prefers this method. For more info on the Snowball method, click here.
Avalanche
With the Avalanche method, you list your debts from highest to lowest interest rates. You pay the monthly minimum payment for each thing, but attack your highest interest rate until it is paid off. Once it is paid off, you roll that money to the next debt on your list. You continue this pattern until all of your consumer debt is paid off.
Pros - Over time you save money because you’re eliminating the debt with the largest interest.
Cons - You don’t always have quick wins by eliminating your number of debts. Emotionally, this can feel discouraging to some people and they’ll quit all together.
The order Jack would pay off his debts with the Avalanche method:
The Avalanche method isn’t my favorite, but it might be best for your situation. For more info on this method, click here.
Lump Sum Payment
With the Lump Sum Payment method, you have received a large sum of money and decide to pay off all your consumer debts. This method could be an option if you win the lottery, inherit money, or sell a big ticket thing (like a house).
Pros - You quickly pay off all your consumer debt and get a clean slate.
Cons - It is probable that you haven’t corrected your bad spending habits yet and you go right back to being in a bunch of debt in a few years (this happens far too often).
The order Jack would pay off his debts with the Lump Sum Payment:
All of it! Boom!
I highly, HIGHLY recommend getting advice from a CPA or similar professional if you’re considering this method. You’ll most likely be taxed for the large amount of money you acquired (and having Uncle Sam after you is not a good feeling). Make sure you have your ducks in a row before spending any of this money. 🦆
Pissed Off!
With the Pissed Off method, you list out your debts by which ones make you most irritated. Maybe a credit card company has terrible customer service and you’re ready to never talk with them again. Maybe you’re tired of how awkward it is with a relative that loaned you money. Maybe you’ve had your student loans for 15+ years and you’re fed up with getting statements in the mail each month. You get to create this list. This is about you, boo!
Pros - You can eliminate debt that you don’t want to deal with anymore. You also get a great dopamine hit.
Cons - Like the Snowball method, you might spend more money over time because you aren’t looking at the interest rates.
The order Jack would pay off his debts with the Pissed Off method:
Jack is so over the awkward moments with his uncle that loaned him money. He is also tired of paying off his student loans and the people at Credit Card #1 are jerks on the phone. He decided to start with the Pissed Off method for these three things and then and finish with the Snowball method.
I learned about this method a few months ago when I read Erin Skye Kelly’s book Get The Hell Out of Debt. For me, this method is a close tie with Snowball. Money isn’t just numbers. It is also emotional. I can’t think of a better way to take control of your money than getting rid of the debt that pisses you off the most. For more information on this method, click here to check out Erin’s website.
In conclusion, these are all effective methods to pay off consumer debt. I’m admittedly partial to a couple of them. The important part is that you pick one and stick with it.
I mean, just think of your life with no payments. No statements in the mail, no creditors calling you, and no awkward conversations with family. You don't owe anybody anything and you own all of your stuff. That would feel amazing, huh?
Soooooooo, stop letting your debt stress you out.
Stick to a budget, save up an emergency fund, pick a way to pay off your debt, and take control of your money!
Your future self will be so glad that you did. 💚
Hi! I'm Jeannette. I've dug myself out of six figures of debt and now have seven figures of wealth. After working in public education for over a decade, I now encourage and empower Millennials to take control of their finances. I love seeing people make changes in their lives and crush their goals.
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This blog post is for educational purposes and is a quick overview of each method. My focus is helping people build the foundations for building wealth. Take the time to do your research and fully understand each method before starting them. Also be aware that some things will have a fee if paid off early. Please reach out to me or seek a professional if you have more questions.
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