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pay down moderate debt

If you’ve made it this far that means you have a healthy emergency fund and have successfully paid off your high interest debt. Hopefully you have a plan in place to keep both of those victories in place and prevent sliding back into trouble. Now it is time to pay down moderate debt. A 4-8% interest rate may not seem like its high enough to worry about tackling right now. Some might argue that your money is better off in the stock market. I think it is critical to keeping up on the Path to Financial Independence.

Pay down moderate debt

Wait… I want to start at the beginning.
Link to the previous step – Step 9: Get a bigger emergency fund

What is moderate debt?

Moderate interest debt is usually a car loan, home equity line of credit, student loan, personal loan, or something similar. Unlike the higher interest debts, these at least tend to be asset backed loans where you get some value like a car or education.  We’ll argue later on whether loans should have been used to finance these decisions or if we should have purchased them in the first place later.  The important thing is paying down these debts so we no longer have this financial liability governing our decision making.

Again, opportunities in life come and go and 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.

Repeat warning

NOTE: the section below is repeated from the High Interest Debt article because the process is exactly the same with these loans as it was with the first set.  Also, not everyone would have had to deal with the higher interest rate loans and might have skipped that step if it didn’t apply to them directly.

pay down moderate debt flow chart

Ok. I want to pay down moderate 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 debt so you can start having control over your own financial life.

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.

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.  For more information from someone not me, check out Money Under 30 and their thoughts on the difference between the methods.

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 pay down moderate debt 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 debt accounts

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 to pay down moderate debt.  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 down moderate debt interest loans owing $ 100 a month and starting with $ 100 surplus to pay down 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 debt

When we were first married we had two student loans, a car loan, and a mortgage.  You can read all about how we paid off $50,000 in 3 years using the debt snowball method in an earlier article.

The Dave Ramsey school of thought would’ve rolled the entire amount onto the mortgage to pay it off as fast as possible too but our mortgage loan rate is low enough that it is not a high priority.  Instead, I calculated what the payment would need to increase to so that the payoff would be in 5 years because I like multiples of five.  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.


Even moderate 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.  Moderate interest debt will control your life and limit your options until it is gone.

Link to the next step – IRAs

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