We’ve always been told the “American Dream” includes a white picket fence, a beautiful home, a cute dog running across the yard, and a family to call your own.
What society tends to leave out is the foundation of debt your dream is built upon.
Debt is money owed or due to another person or entity – and one that 77% of American households have in common. Whether your debt is consumed by credit cards, student loans, or both, one of the most common goals among Americans is becoming debt-free and how to best accomplish it.
Keep reading as we take a closer look at prioritizing debt and helpful strategies to reach a debt-free existence.
Drowning in Debt: A Quick Look at Debt in America
While household wealth is on the rise in the United States, unfortunately, so is debt.
According to Ramsey Solutions, the total personal debt in the U.S. is at an astounding $17.5 trillion – an all-time high. Now, 77% of American households have some form of debt, the most common types including credit card debt, auto loans, student loans, home equity lines of credit, and mortgages.
Achieving the American dream was not always built upon a mountain of debt, but rising costs have forced people to rely on borrowing money to achieve even the simplest of ideals – going to college, owning a home, or offsetting grocery costs.
The inflation rate in the U.S. has risen by 19% since 2020, meaning everything now costs 19% more than it did four years ago. Here’s a brief breakdown of how prices have risen for everyday “luxuries:”
- A gallon of gas costs 29% more in 2024 than in the beginning of 2020
- Grocery prices have increased by 25% over the past four years
- In 2020, the average interest rate for credit cards was 16.61%, now it stands at 22.63%
Credit Cards, Student Loans, Mortgage…Where Do I Start?
While some of us are lucky enough only to have one debt repayment schedule to worry about, many of us are plagued with debt from various sources, each with its own outstanding balance and interest rates to worry about.
So, how do you begin prioritizing which debt is most important?
Factors to Consider
Before committing your extra income to a specific debt, there is more to consider than which debt has the highest balance.
Consider the following when deciding which debt should be your focus:
- Overdue accounts: Overdue accounts, also known as delinquent accounts, are highly overdue and can significantly impact your credit rating. Considering delinquent accounts can lower your credit and potentially limit your financial power, these should be first priority when paying off debt.
- Interest rate: Loans or debts can have two types of interest rates – fixed or variable. Fixed interest rates are those that will never change. Variable interest rates, like those seen with credit cards, will fluctuate depending on market conditions. If market prices increase, unfortunately your interest rates will too.
- Type of debt: The type of debt you have may require more urgency – and more of your paycheck – than others. For example, if you have debt from taxes, that may require more attention than attempting to pay off your auto loan.
- Outstanding balance: Sometimes, it’s not what you can do for your debt but what your debt can do for you. While it may be worthwhile to tackle a small balance in the hopes of paying it off quicker (and providing some much-needed motivation), if you have a revolving debt close to its limit, focusing your efforts there may be better. Not only could it boost your credit, but you may also stand a better chance of securing better rates in the future.
Ask Yourself…
When it comes to prioritizing debt, start by listing all your debts. Within the list, include minimum monthly payments, outstanding balance, estimated payoff date, and interest rates. After you’ve compiled your list of debts, ask yourself these questions:
- Which debt impacts your current budget the most?
- How does your monthly budget look with this repayment plan? What would your budget look like without it?
- Will paying off this debt make a significant impact on your overall budget compared to others?
Debt Snowball vs. Debt Avalanche: Which Strategy Will Get You Debt-Free?
When you venture down the road to debt-free living, you’ll have a number of paths from which to start your journey. Two of the most popular avenues are the debt avalanche method and the debt snowball method.
What is the Debt Snowball Method?
While some debt payoff methods focus their efforts on interest rates, the debt snowball method actually asks you to ignore interest altogether and focus on the balance.
Here’s how the snowball method to pay off debt works:
- List out your debts from smallest to largest, ignoring interest rates and focusing on the balance.
- Pay the minimum required payments on everything but the smallest debt you owe.
- Put as much money as your budget will allow towards the smallest debt until it is paid off.
- When the debt is paid off (yay!) move on to the next smallest debt and put as much money towards it as possible.
Like a snowball rolling down a hill, the amount of money you have to put towards your debt grows and grows until you are left with one giant “snowball” of a payment going towards your largest debt!
What is the Debt Avalanche Method?
When you opt for the debt avalanche method, you’ll order your debts by interest rate, starting with the highest at the top of the list.
Working similarly to the snowball method, you’ll make minimum payments on your debt while putting all of your extra money towards the debt with the highest interest. As you pay off the high-interest debt, you’ll continue to move down the mountain until you reach debt freedom!
It’s worth noting the avalanche method is not for the faint of heart. Since you start at the peak of the debt mountain, experiencing a “win” and seeing progress can be a slow journey.
Debt Snowball vs. Avalanche: Which is Best for You?
Determining which debt payoff method to use will largely depend not so much on your debt, but on you as an individual.
If you are a person who needs encouragement and reassurance, the snowball method will likely be your best chance of debt payoff. While it takes longer to pay down your debts and cost more in interest, it provides consistent motivation and “wins” to stick to your debt repayment plan.
However, if you are someone who is more disciplined and wants the fastest – and least expensive – route to debt freedom, the avalanche method is for you.
The avalanche method will take longer to see progress, but by paying off the debt with the highest interest first, you’ll save more in your pocket in the long run.
Key Takeaways To Becoming Debt-Free
At Auto Money Title Loans, we believe the path to securing a future of financial freedom starts with freedom from debt. Here are some key takeaways to consider on your debt repayment plan journey:
- When prioritizing your debt, consider outstanding balance, interest rates, delinquent accounts, and the type of debt.
- Use your list of debts and monthly budget together to form an accurate idea of what you can afford, and which method may work best in your specific situation.
- When choosing between the debt snowball or debt avalanche method, consider your own personal circumstances and preferences when forming a decision.
Disclaimer: The information provided in this blog post is for informational purposes only and should not be construed as financial advice. We are not financial advisors, and the content provided does not constitute financial, investment, or life insurance advice from a licensed professional. The content of this blog post does not replace personalized advice from a licensed professional who is aware of your individual circumstances.