If you’re stuck under an avalanche of debt, you might think the easiest solution is to pay the minimum on your balances each month. But you can pay it off faster and save money in the process by putting as much money as possible towards your high-interest debt first.
The popular debt repayment method, known as “the debt avalanche,” helped “Dear Debt” author Melanie Lockert pay off $68,000 in student loans and save money in the process.
“You typically save money because you’re focusing on the highest interest,” Lockert tells NBC News BETTER.
The debt avalanche is an alternative to the “wealth snowball method,” where you focus on paying more than what’s owed on your minimum monthly balance, says Lockert.
Let’s say you have multiple loans with different balances and interest rates. For example, you might have $5,000 in credit card debt at 16.29 percent, a $11,000 car loan at 3.7 percent, and $60,000 in student loans at 4.2 percent.
Using the debt avalanche method, you will pay the minimum on each debt but will focus on paying off the credit card debt first with any extra money you have.
There is no easy solution for paying off debt, according to Lockert, who has learned from experience. Shortly after gradating from New York University in 2011, she moved to Portland, Oregon, where the cost of living was significantly less than New York City, but where she struggled to find work.
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Lockert eventually landed a job at a non-profit that netted her $31,000 a year. She started doing side hustles, she recalls, often working seven days a week.
“I pretty much cut back every single way I could,” says Lockert. “I didn’t have health insurance, I didn’t have a car, no pets. I walked and biked everywhere and took every gig I could take. And after cutting back pretty much all the expenses I could, I hit a plateau and realized I can’t cut back anymore, and so I started side hustling as much as I could and earning more money.”
The millennial found side gigs on Craigslist and TaskRabbit, and made extra money pet sitting.
“Every time I got paid from a side hustle I put that money towards my debt. That helped lower the interest,” she says.
Lockert eventually launched her own freelance writing business, which doubled her income. At the time, her studio in Portland, which she shared which her then boyfriend, cost her just $400 a month. The extra money coupled with a low cost of living allowed her to pay off her high interest debt in under five years.
“Once I got rid of those 7.9 interest loans, I just felt so great,” Lockert recalls.
When she was finished paying off her high-interest student loans, she could focus on paying off her next highest interest debts, she says.
“Then, towards the end of it, I was just down to my undergrad loans of 2.3 percent, and just focused on that,” she says. “And obviously those payments went a lot further at that point because the interest was so low, and then I could make more principal headway on the payments.”
There’s no fun advice. There’s no easy hack. There’s no magic secret. It’s really just about being consistent.
How to do it: Let’s say you have three loans with different interest rates. Focus on contributing as much money as possible to the highest interest rate loan first while paying the minimum monthly balances on your other debt. When the highest-interest loan is paid, focus on paying off your next highest interest debt.
Save as much money as possible: Focus on reducing your cost of living, if possible. Cut back on unnecessary expenses and look into side gigs that can earn you extra income. Put your extra savings towards paying off your high-interest debt.
Change how you think: When you’re buried in debt, it’s easyto make excuses, or to convince yourself that paying off your loans is impossible. The key is to have a plan and stick to it consistently.
Remember to have fun: Paying off large sums of debt can be stressful and exhausting. To prevent burn out, set milestones that will allow you to have fun and stay motivated. For instance, for every $1,000 of debt paid off, treat yourself to something enjoyable.