Paying off your debts, yes, but how?

Paying off your debts can seem like a daunting task. Besides the financial aspects, there are also psychological and relational factors that can be a significant source of stress. Fortunately, there are several possible strategies to better manage the situation. Among the most popular approaches are the “avalanche” and the “snowball” methods. myLIFE explains what these are before discussing other possible strategies.*

If nobody likes to take on debt, everyone understands the necessity of resorting to it in certain situations. This may be to cope with a setback or to carry out an expensive project such as buying property. Once the debt is taken on, it will have to be repaid. But how do you manage repayment when you have several debts to pay off at the same time? What is the best method to achieve this quickly? The answer depends on the situation and each person’s psychology. For example, you might want to pay off the small debts first to feel like you are making rapid progress. You might prioritize the debts that cost the most in order to limit the impact of interest as much as possible. You might even choose to prioritize investing in certain circumstances and pay everything off eventually.

Let’s look at some of the possible strategies, while making it clear that these are theoretical approaches that need to be adapted to the reality of your situation.

The snowball method involves paying off the smallest debts first, regardless of their interest rates.

The snowball method

The snowball method involves paying off the smallest debts first, regardless of their interest rates. Once the smallest debt is paid off, you move on to the next one, and so on.

How should you go about it?

• • List all your debts in ascending order.
  • Pay the minimum required for each debt (if you have monthly payments, for example) except for the smallest one.
  • Focus all your remaining resources on the smallest debt.
  • Once the smallest debt is paid off, apply the same method to the next debt.

While this method has the merit of being simple to follow and producing quickly visible results, it can potentially prove more expensive in the long term since it does not take into account the different interest rates associated with your debts. In other words, the simplicity and motivation of seeing results quickly come at a cost.

The avalanche method

The avalanche method involves repaying debts with the highest interest rates first. This helps minimize the total amount of interest you will pay throughout the repayment process.

How should you go about it?

• • List all your debts, this time starting in descending order of interest rates.
  • Pay the minimum required for each debt (if you have monthly instalments, for example) except for the most expensive one in terms of rates.
  • Focus your remaining available funds on the most expensive debt.
  • Once the first debt is repaid, apply the same method to the next debt.

The advantage of this method is twofold: not only do you save money in the long run by limiting the impact of interest as much as possible, but you also save time in the total repayment of your debts. On the other hand, this method may take longer before producing significant results. This can affect motivation and morale.

The avalanche method involves repaying debts with the highest interest rates first.

The proportional repayment method

This method involves allocating a portion of your financial resources to each debt based on its total amount or remaining balance.

How should you go about it?

• • Make a list of all your debts without distinction.
  • Add up all the debts to get a total amount.
  • For each debt, calculate the percentage it represents in relation to the total amount of debts. This percentage determines the share of your repayment budget that will be allocated to it.

This method is relatively simple to implement for those who have many debts and it balances repayment among all your debts. However, it is not the most financially effective method as it may prolong the time needed to repay debts with high interest rates.

More broadly, neither this method nor the previous ones take into account other factors such as the emotional implications of each debt. Some debts, regardless of their amount and interest rate, can be a significant source of anxiety depending on the person or institution to whom they are owed.

Some debts, regardless of their amount and interest rate, can be a significant source of anxiety depending on the person or institution to whom they are owed.

The debt priority method

This method involves making a list of your debts while taking into account various factors, such as the amount and the interest rate, but also the emotional impact they have on you. This way, you can choose to focus first on the debts that cause you the most stress.

How should you go about it?

• • List all your debts according to their emotional or personal impact.
  • Pay the minimum required for each debt (if you have monthly payments, for example) except for the one that is absolutely the highest priority for you.
  • Concentrate your remaining available resources on this priority debt.
  • Once the first debt is paid off, apply the same method to the next debt.

The obvious advantage of this approach is to reduce the psychological stress associated with certain debts, which can improve your motivation. The downside is that what is a priority for you may not necessarily be the most financially advantageous, as you could be ignoring debts with high interest rates.

The compound interest exploitation method

Instead of using your money to quickly pay off your debts, this method encourages you to invest and use compound interest to your advantage in order to make your debt repayments when they are due.

How should you go about it? Assess the interest rate on your debts. If the rate is lower than the potential return on your investments, you may choose to invest rather than pay off your debts quickly. At maturity, the accumulated amounts allow you not only to pay off all your debts and the related interest, but also to have a remainder that belongs to you.

If everything goes well, this method offers the advantage of earning more money by investing than what you lose in interest on your debts. The disadvantage lies in the risk taken if the investments do not yield as much as expected. Between aiming for less debt or more investments, the decision is not easy to make. Seek advice from experts.

There are several methods for repaying your debts, each with its own advantages and disadvantages. Whether you choose the snowball method for its psychological motivation, the avalanche method to save on interest, or other strategies like debt prioritization, the important thing is to find the one that best suits your financial and emotional situation. The key is to remain committed and proactive in managing your debts to regain financial balance. Good luck!

* Content translated from French by the BIL GPT AI tool