Ranking Every Debt Pay Off Strategy (Worst to Best!)

Imagine this, you finally get serious about paying off your debt. You pick a strategy, you feel motivated, but a few weeks in, something feels off. You're not seeing the progress that you expected. And then it hits you. Am I doing this right? Did I just pick a strategy that's costing me time or worse, thousands of dollars? Not all debt payoff strategies are created equal. And if you pick the wrong one, it can make or break your debt free journey. As someone who's paid off $35,000 of debt in two and a half years on a $37,000 income, I researched every debt payoff strategy out there. And today I'm ranking them from the absolute worst to the best. And my number one pick is not debt snowball or avalanche. It's something even better. And just to be clear, some of these strategies can be extremely risky. So let's start with the absolute worst. Number 14, strategic default. Strategic default is when you intentionally stop paying your debt to force it into collections or settlement. Now, this option is the most dangerous because it can destroy your credit. And anytime you go to apply for a future loan, you're absolutely going to be charged a higher interest rate. And then factor in the legal consequences. I mean, people pick this option because there's so much financial distress that they don't see any other way out. Think about somebody who's underwater on their mortgage or they have tens of thousands of credit card debt, not just on one card, but on multiple cards and they can't see a path out. Now there's actually no reliable data on how many people use this strategy because it's not something you apply for. You just do it. And this one is absolutely the worst because it causes the most financial distress. Strategic default is the worst of the worst, but these next ones, people use them all the time and still get burned. Number 13 bankruptcy. Bankruptcy is a legal process that wipes out or restructures your debt. It's basically hitting the legal reset button. Now there are two types of bankruptcy chapter seven, which eliminates most of your debt and chapter 13, which puts you on a three to five year payment plan. This is for people who have overwhelming amounts of debt and have no clear payoff path. So many low income earners who have no real big assets typically look at bankruptcy as an option. Bankruptcy also stops collections immediately, which is why a lot of people find this so appealing. That can be a huge relief, but it comes with big consequences. Just like with strategic default, the next time that you apply for a loan, if you even get approved, your interest rates are going to be higher and keep in mind bankruptcy stays on your credit report for years. Anytime you're applying for a future loan, those creditors are going to access your credit report and see they have bankruptcy on their history and that's going to be a mark against you. Number 12 barring from a 401k. This is where you take out a loan from your retirement plan, your 401k in order to pay off debt. Basically you're robbing future you to pay back past you. So people with stable jobs, stable paychecks who have no other options typically like to use this. So they justify it by saying, Oh, well I'll just pay myself back with interest. The problem is you lose investment growth when you're taking money out of your 401k. Not to mention what if you lose your job, you risk still owing that money. Even if you were to lose your job, be let go from your employer. And I found this really startling about one in five people who have access to a 401k loan, have one at any given time. I mean this is much more common than people realize. Number 11 debt settlement. Debt settlement is negotiating to pay less than what you owe after falling behind on payments. Think about this as damage control. So typically I find people who have already fallen behind on their payments and who also want to reduce total debt quickly. Look at debt settlement as an option and I get it. You hire a debt settlement company who just handles it for you, but it comes with serious consequences. Basically how this works is you have to force your debt into collections. That means you have to stop paying on it. Once it hits collections, then that debt settlement company can negotiate a lower payoff amount. That means your credit takes a hit and you could be taxed on any forgiven amounts. And this is very common with credit card debt. If your credit card debt is settled for less than what you owe, that difference in between those amounts is what you could pay taxes on. And honestly, people end up in situations like this because they don't have a clear system for managing their money. And that's why today's sponsor is Monarch. Monarch is a personal finance platform that brings everything together. Your spending, savings, credit score, debt, net worth. This way you can clearly see all of your finances in one spot. There's even built in payoff projection calculators that tells you how long it'll take you to pay off debt based on your real payment amounts. Getting clear on where your money is going is the first step to paying off debt. And I'm really happy to see an app that understands that. Start your free trial and get 50% off your first year with Monarch by heading to monarch.com and using code DFM50 at checkout or use the link in the description box below. Thank you Monarch for your long-term partnership of the channel. Now these next strategies look smart on the surface, but the trade-offs can be dangerous if you're not careful. Number 10, cash out refinance. This is where you roll existing debt into your mortgage. Think about the long-term trade-off when you're doing a cash out refinance. This is for homeowners who are trying to lower their monthly payments and interest rates. So if you have high interest credit card debt, you do a cash out refinance and then roll that debt into your existing mortgage. So you might save now, but pay on it much longer. This extends the debt on your house for decades and adds to the total cost. Number nine, home equity loan or HELOC. So a home equity loan or a HELOC is when you borrow against your home's equity to pay off debt. That is the money that you've been applying towards that principal in your mortgage. All of that money piled up, you're just taking that out and then you're using it to pay off any existing debt you have on the side. But this turns debt into a bigger risk because now that unsecured debt is tied to the debt on your home. So homeowners with equity who have strong incomes typically look at this as an option. And typically the HELOC and home equity loans are used for home renovations, but approximately 39% of homeowners are using home equity loans or HELOCs to pay off debt. In over a million HELOCs are being opened each year. This is becoming common again and that's really scary. Now these next ones aren't bad, but they're not enough on their own. Number eight, using cash savings. So what you do is you pay off debt by using existing cash savings that you have on hand. So it's high reward yet higher risk because what you're doing is you're removing the safety net that you've built in order to pay off debt, leaving you behind with an unexpected expense. So people who have stable income and can rebuild savings quickly will look at this as an option. And I get it. I could see somebody who had a lot of student loans in the past and then made minimums on student loan payments while they waited for a higher paying job. And so they were stacking up cash as they moved into a higher paying job and then looked back at that student loan and said, you know what, I'm annoyed by you and I'm just going to get rid of it and pay it all lump sum with all the cash that I have. So fast progress, but no safety net. So you're just one unexpected financial expense away from getting yourself into real trouble, which is why I'm not a fan of this strategy. If you're enjoying this breakdown so far, don't forget to hit like and subscribe. This is exactly the kind of content I make to help you build better budget behavior. Number seven, debt consolidation or personal loan. This is where you take out one loan. It combines all of your debts into one payment. It simplifies things, but it doesn't necessarily solve the problem. People who are overwhelmed by multiple payments, multiple debts will look at debt consolidation. They want simplicity and oftentimes they're enticed with a lower monthly payment. But what it does is it extends the life of the loan that you're paying over time, which in turn increases the amount of interest that you're paying over time. So does it help you organize? Yes, but it doesn't address the spending patterns and behaviors that got you here in the first place and quick reality check here. Most people don't fail at paying off debt because of math. They fail because they can't stick to a plan. All right, now we're getting into strategies that actually start to work. Number six, refinancing individual loans. This is where you replace a loan with one that has a lower interest rate. I like to look at this as quiet efficiency at play. So this is for people primarily who have improved their credit since taking out that loan and then they apply for refinancing in hopes of getting a lower interest rate. Now, aside from mortgages, you can really refinance loans like car loans or even student loans. If you've been making payments on time and you've seen that your credit score has improved, you can absolutely try to refinance. It's not super exciting and fun, but it's really effective. Number five, balance transfer. So in this payoff strategy, what you're doing is you're moving your debt to a 0% interest card and then the plan is to pay it off before that 0% term expires. This in my opinion is the best short term hack and really for people who are disciplined enough to stick to that plan and pay it off completely. I've seen time and time again people who use this method and they're like, all right, I've got 18 months to pay off the debt before the interest kicks back in and then they miss that deadline because they haven't addressed the spending patterns and behaviors that ultimately led them to getting into credit card debt. So in my opinion, this can be easy to misuse if you don't have that disciplined mindset. If you haven't worked on the way you feel about money, your relationship with it, you're going to end up right back in the same situation. Number four, selling assets. This is where you are selling your possessions to pay off debt. It's very black and white. I think this is one of the fastest ways to make progress. This strategy is really for people who are ready to pay off debt quickly and they're willing to go to the ends of the earth to make that happen. It's really strategic if you are selling assets of value. Think of a car, jewelry, any other assets that you have that are of high value. Think about electronics, furniture, musical instruments, things that are going to help you take those cash proceeds and then put it immediately towards the debt. The drawback here though is it does take time to post and then eventually sell those items and also you're departing with your possessions. Are you comfortable with that? I think for a group of people who are really motivated in the identity of being debt free over the identity of what I have, what I possess, do you want to own those things or would you rather own debt freedom? I think that's the question you have to ask yourself. All right, if you've stuck around so far, we're getting into the top three and these are a favorite among those in the debt free community. Number three, debt avalanche. This is where you are paying off the debt with the highest interest rate first. So if you have multiple debts, you're going to order them by highest interest rate first. You're going to make minimum payments on everything else except for that debt with the highest interest rate. First, you're going to throw everything that you have at that payment until it's gone and then you're going to roll over that existing minimum payment from that first debt into the second one. So if you had a minimum payment of $50 on your first highest interest rate debt and then the second highest interest rate debt had 25, you're going to roll that 50 to the 25 so now you've got $75 going into debt number two plus any extra payments. Now this works best for those who are thinking mathematically. We want to save the most amount of interest in the long run. The problem is most people end up burning out because they're not seeing the progress as quickly as they hoped because some of those high interest rate debts have outstanding balances of 30, 40, 50 K and so you can't see the progress really fast initially. But if you're disciplined, numbers focused, this method can really work. Number two, debt snowball. Now this one I personally use to pay off my student loan debt and what you do is you order your debt balances according to smallest outstanding balance first and you're going to pay that one off first regardless of the interest rate. It's effective because it gives you those quick motivating wins where you're like, oh, I paid off a $500 loan. I paid off a thousand dollar credit card. All right. Like I'm excited. I can see the progress. I love seeing $0 balances on all of those loans and debts. I mean, wouldn't you? This is for people who are motivated by quick wins and that momentum is what keeps people going. Which strategy are you using right now or do you want to try? Let me know in the comments and the best strategy saving the best for last. Number one, stair stepper. I love stair stepper. It's a mix of snowball and avalanche. It is going to group like debts together according to those interest rates and to the smallest outstanding balance. So you're effectively paying off the highest interest rate of that particular group, but that group is also going to have some of your smaller balances. So you're getting a blend of the quick wins coupled with paying off the highest interest rate. I think this is the best overall because it combines two really effective methods into one. People who want motivation and efficiency are going to work really well with this strategy and it works especially well for those people who have a wide range of debts, but also have varying interest rates and varying outstanding balances. I love stair stepper. When I see one of my students who is a candidate for this strategy, I'm like, you need to go all in with this because it gives you the quick wins and it also helps you save the most amount of money in the long run. If you take one thing from this video, it's this. The best strategy isn't the one that saves you the most money. It's the one you actually finish. If you actually want to pay off debt, then check out this next video for more strategies.