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pay down high interest debt path to FI

I’m not going to break any ground here telling you that high interest consumer debt isn’t good for your financial welfare. We all know that the first step toward a life of financial independence is to pay down high interest debt. Knowing the destination isn’t the same as knowing the directions for getting there however. There are several, very popular, methods for paying down debt at an accelerate pace we’ll look at later in the article so stay tuned.

Pay Down High Interest Debt

Wait… I want to start at the beginning.
Link to the previous step – Step 7: Employer 401k Match

We all know high interest debt isn’t good.

High interest debt, for the purposes of this discussion, will be any loan you are currently paying back with an interest rate over 8%. The cutoff is somewhat arbitrary but should exclude mortgages, most auto loans (I hope), and most student loans. We’ll get to those eventually but let’s deal with the loans with the biggest impact first.

Loans with an interest rate > 8%… got it

High interest debt comes in many forms from credit card balances, payday loans, some auto loans, boat loans, and personal lines of credit to name a few. At this point in the journey, it doesn’t really matter how or why you found yourself with high interest debt since you are now making an actionable plan to pay it down and that is what really matters. 

Go ahead and forgive your past self for getting in this situation and move on to making this right.  Learn from those mistakes but hopefully you will be in a strong enough financial position to not need a high interest loan again any time soon. This is important, so don’t skip that part.

Everyone has debt, how bad can it be?

The more debt you have, the more of your life is decided by someone else, either directly or indirectly.  Having a lot of debt and/or expenses means someone else already decided where your money will go each month and it won’t be to your net worth.  It functionally reduces your available options in any given scenario.  The faster you can reduce your debt load the sooner you can start taking back control of your financial life and increase the number of options and flexibility you have in general.

People tend to underestimate how much debt controls their daily lives because it has become so ubiquitous and normal that nobody thinks any different. Think about it… how many people do you know your age that have no debt at all except maybe a mortgage?  Some of these situations are obvious.

How debt controls our life

Want to buy that new game? You can’t because after paying all of your bills and loan payments each month there isn’t enough left over for a fun purchase.

Want to go out to eat tonight instead of eating leftovers?  You can’t because all of your money went to paying down that credit card bill

Do you want to transition to being a stay-at-home parent after the birth of your child? You can’t because losing that full time income would be unworkable for your budget

Applying for a new credit card for rewards points? Declined because you have a low credit score primarily from continuing to have a high usage rate

But wait… there’s more.

Some of the downstream effects of carrying too much debt are less straightforward though but just as important to consider long term. Consider the following situations.

Want to go on vacation? You can’t because you can’t afford to take time off work because you don’t have any time banked and are afraid that taking too much time off work puts you in a bad position at your work and fear layoffs

Want to change jobs for a new opportunity? You can’t because the risk involved is too much with your current bills or the benefits at the new place aren’t as good even though the opportunity is better overall and you can’t afford a temporary hit to your finances

Do you want to escape a toxic work or home life? Nope. The debt straining your expenses each month could potentially block your ability to get out of situations you know you shouldn’t stay in.

Applying for a mortgage or car loan on your dream?  I hope you are prepared to either be denied outright or be forced to decide if a much higher interest rate on those loans are worth it in the long run.

I’m making payments, get off my back

Of course you are making payments but if they are the minimum required payment you might not be making the progress you think you are. According to the 2020 Credit Card Study by WalletHub, the average American household has approximately $8,000 in credit card debt. The average interest rate on a credit card is around 18% and the minimum payment is usually 2-3% of the balance. Using the handy Credit Card Payoff Calculator from Bankrate to enter in $8,000 at 18% paying $200 a month we see that it won’t be paid off for 5 years.

Paying that off in 5 years also assumes you make zero additional purchases while paying it off too. If you keep adding to the total faster than you are paying it down each month you will never be out of debt. Nobody wants to stay on that treadmill of debt for the rest of their life. Choose to slow down now so you can step off for good in the future.

Ok. I want to pay down high interest debt now

Overall, opportunities in life come and go quickly. Lower amounts of debt in your life affords you both cash flow and the flexibility to take advantage when it might be best to do so. The more debt you have, the more of your money is spoken for before it even makes it to your bank account. Someone else has already decided what you get to spend your money on every month. You need to pay down high interest debt so you can start having control over your own financial life.

pay down debt flow chart

Snowball & Avalanche

That honestly sounds like it should be children’s book starring the lovable duo of a polar bear and a penguin. I know they don’t really mix in the wild but kids will believe anything. They could be zoo habitat buddies that go on adventures in the park while teaching people the importance of conservation. Wow… this went off the rails quick. Apologies, back to finance.

Now that we, hopefully, both agree that unnecessary amounts of debt need to be removed from our life as soon as possible the question comes to how exactly should we go about accomplishing that.  There are a lot of debt management methods out there but I’ll stick to the two most popular: the Snowball Method and the Avalanche Method.

Which method is better?

Arguments exist in the personal finance arena on which method is better or more appropriate but I honestly believe it depends more on the psychology of the person than anything else.  You could make eloquent arguments about how the Avalanche method is more mathematically optimal if followed though. It involves waving dozens of spreadsheets at your friends and family, so prepare for that.

Arguments can be made that the Snowball Method is more psychologically satisfying and that might encourage more people to stick to the plan longer because there is something so fulfilling about closing those smaller loans for good.  

Quick wins vs mathematically optimal

You really need to ask yourself if you’d prefer to see more frequent ‘wins’ in the form of accounts closing or would you prefer to make paying down these debts as mathematically sound as possible.  Looking at my background as a financial analyst turned data scientist I could forgive you for assuming I would go for the Avalanche method that maximizes the math of the situation to pay the least amount of interest possible. 

That isn’t what happened though.  We chose to employ the Snowball method because paying off the smaller debts first before moving on to the larger debts was more psychologically satisfying and kept us motivated to continue. We liked the satisfaction of closing those accounts for good.

Play to your strengths, not the spreadsheet

The differences between the two methods might be a moot issue if your higher interest debts are also your largest balances, but in the event that is not the case you need to consider which one appeals to you as a person.  Not all decisions in personal finance are spreadsheet optimizations so play to your strengths.

Note first: at this point we’ll assume you’ve attempted to renegotiate the debt down as far as possible, consolidated to lower rates, or refinanced debts where that would make sense so we are only discussing paying down your existing debts.

First: rank the high interest debt

Both of the methods follow the same basic steps, varying only on the order in which you work your way through your debt accounts. The snowball method starts by taking all of the debts you have (the 8% or higher in this step) and sorting them from smallest balance to largest balance. 

The Avalanche method starts by sorting those same accounts from largest interest rate to lowest interest rate.  Once the order is set, make sure you are paying the minimum payment on all of the accounts every month as a base.  

Second: pay down debt until you close an account

Next, evaluate how much money you are comfortable allocating in your budget toward debt pay down.  Each month as you pay the minimums on your loans, add that extra money on top of the first loan on your list (ranked earlier by the method you chose). Keep paying those amounts every month until loan #1 is paid off. 

Once that occurs, take the entire amount you were used to sending loan #1 and start paying that on top of the minimum to loan #2 (loan #1 minimum + loan #1 minimum + extra money). Keep paying those amounts every month until loan #2 is paid off.

Once that occurs, take the entire amount you were now sending loan #2 and start paying that on top of the minimum to loan #3 (loan #1 minimum + loan #1 minimum + loan #3 minimum + extra money).

Third: repeat for as long as necessary

Keep repeating that process until you’ve paid off all of the loans you have with interest rates over 8% for now.  The urge to keep the good times rolling and knock out the mid-tier interest loans will be strong right now but temporarily hold off until we evaluate the next step in the path.  I promise we’ll get right back to slaying that debt.


Don’t worry. It might be hard to follow the process written out like that and easier to see in an example with numbers. The chart below shows how you would pay off six high interest loans owing $ 100 a month and starting with $ 100 surplus to pay down high interest debt.

You’d pay $200 to loan A and $100 to B through F until loan A is paid off. This is payments setup #1 below. Once loan A is closed, add the $200 to the $100 already being sent to loan B. You are now paying $300 to loan B and $100 to C through F until loan B is paid off. This is payment setup #2 below. Repeat, repeat, repeat.

LoansMinimumsPayments #1Payments #2Payments #3Payments #4Payments #5Payments #6
Total Paid Monthly$700$700$700$700$700$700

Our path to pay down high interest debt

When we were first married we had two student loans, a car loan, and a mortgage.  To start paying them down we started by paying all of the minimum amounts and adding a hundred extra dollars to her student loan (because it was the smallest of the loan balances).  Eventually we paid that student loan off and rolled that entire monthly budgeted loan payment on top of the car loan to speed up the repayment timeline. 

A year later we paid off the car early and rolled that entire amount on top of my student loan payment each month.  We successfully paid off our student loans this year and are now rolling (most, not all) of that onto the mortgage payment.

The Dave Ramsey school of thought would’ve rolled the entire amount onto the mortgage to pay it off as fast as possible too. We considered it but our mortgage loan rate is low enough that it is not a high priority.  Instead, I calculated what the payment would need to be so that the payoff would be in 5 years because that sounded like a fun amount.  Even a five year pay down period would pay off the mortgage 7 years earlier than the term of the loan dictates.  Personal finance is flexible and you can always alter the plan if you need or want to.


High interest debt needs to be paid down as soon as possible.  Make a plan to pay it off that fits your style and stick to it.  High interest debt will control your life and limit your options until it is gone.

Link to the next step – Increase your emergency fund

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