How to pay off your debt the Fiscal Fitness Phoenix Budgeting Method

Once you learn how to budget, especially when you use the Fiscal Fitness Phoenix Budgeting Method, you tend to notice you have a lot of extra money at the end of the month. Your budget should show you exactly how you should be paying expenses on payday (not on the due date), using cash (check out our podcast episode on using cash here) to pay for day-to-day spending, and saving for random and non-recurring expenses like home repairs, auto repairs, gifts and vacations. When you are budgeting for all of these expenses, you should have extra money in hand.

Our challenge to our clients is to set a goal to direct you on what you do with that extra money.  It could be extra towards retirement and investments, vacations or your kids’ college funds.  But for a lot of people, their first goal is to pay off debt.  Student loans, credit cards, car loans, high-interest title loans and mortgages are all types of debt that people want to get rid of quickly.  (Contrary to popular belief, student loans are not really “good debt”, but we will talk about that another time).

Below we’ll explain four different debt payoff strategies that each have their benefits.  The difference between their benefits depends on a person’s unique financial situation.  Some people are very motivated and want to get rid of their debt as fast as possible, no matter the sacrifice.  Other people need a quick win to stay motivated throughout the process and need a different strategy. And there’s a debt payoff strategy for each.

Debt Payoff Strategies

There are four major debt payoff strategies, listed below in no particular order.

Snowball

This is the strategy popularized by Dave Ramsey.  It says to list your debt in order of lowest balance to highest balance and pay off the lowest balance first.  Then pay off the next lowest balance and so on.

Benefits

This strategy allows you to get a quick win and stay motivated to keep paying off your debt.

Who Benefits?

People that have trouble staying motivated and need to see quick debt reduction.

Avalanche

This is the strategy that Suze Orman prefers.  It says to list your debts in order of highest interest rate to lowest interest rate and pay off the highest interest rate first.  Then you pay off the next highest interest rate and so on.

Benefits

This strategy allows you to pay off the debt that is costing you the most money because of the high-interest rates.

Who Benefits?

People that are very motivated to pay off debt and people that have debt with varying and high-interest rates.

Highest Payment

This strategy is favored by “Rich Dad, Poor Dad” author Robert Kiyasaki.  It says that you list your debt in order of highest payment to lowest payment (excluding real estate) and pay off the highest payment first.

Benefits

This strategy frees up the most money by paying off the highest payment first.

Who Benefits?

People with varying payment amounts and people that don’t have real estate in the debt portfolio.

Emotional Baggage Pay off

This is our own debt payoff strategy creation.  This says that some people look at one debt and feel really yucky about it, so the debt that causes the most emotional reaction is the one you should pay off first.  For example, if you have three credit cards all with $5000 dollars on them, but one was the card you paid your attorney for your divorce, you probably want to pay off that one first.  It will reduce so much stress and help stop you reliving a bad decision.

Benefits

This frees up debt along with reducing your stress.

Who Benefits?

People who look at a single debt and feel yucky or get angry every time they pay it.

Common Mistakes When Paying Off Debt

Regardless of which method works best for you and your financial situation, we want you to be aware of a few common problems and some errors we frequently see when people are working to pay off their debt.

Divide and Conquer

If you have multiple debts the worst thing you can do is try to pay a little bit more than the minimum towards all of them.  When you do this, you divide your money and don’t conquer anything.  The best option is to pick one debt to pay off, pay the minimums on the rest and throw every extra penny on the one debt that you chose to tackle first.

Not Saving for Random and Non-Recurring Expenses

A tenant of the Fiscal Fitness budgeting system is setting aside money every month to go to different expenses that don’t hit every monthly.  Some examples of non-recurring and random expenses are subscriptions, clothing, vacations, house repairs, car repairs, taxes, licenses and registrations or semiannual insurance premiums.  Basically, this is anything that can happen unexpectedly (like your car breaking down) or anything that doesn’t happen monthly (like an annual car insurance payment).  The idea is that these are expenses that ARE going to happen but are never budgeted.  When these expenses come up, you typically have to put them on a credit card. Budgeting for them breaks that cycle.

You may say “but how can you say save for clothes or vacations before you pay off debt?”  Let me pose this question to you: Say you cleared out your checking account of that extra money at the end of the month to pay off a credit card and didn’t put anything towards your random/non-recurring expenses. Then say you end up having to have your car repaired.  How are you going to pay for that?  Yup, with your credit card.  Thus starting the credit card debt cycle all over again.

It’s important to set aside money monthly for these expenses, and the best way to do that is come up with a yearly average for each expense then divide by 12.  This is the amount to set aside each month.

Changing Pay Off Strategies Mid Payoff

This happens most often because you hear a famous financial guru make a recommendation, read an article about some new financial rule, or talk to a friend who has paid off his or her debt.  They say, “Don’t do it that way. The best way is this way.” But don’t listen to them. Choose your debt strategy and stick with it.  Changing midcourse will only cause frustration and decrease your motivation.

Just Keep Going

If you are paying off debt you are doing it right.  There is no right or wrong way to pay off debt.  Each person has to choose what fits their life and their personality best.  Stick with it and throw all your extra money at that one debt you choose (after saving for random expenses) and you will get there!  Good luck!


If you want help figuring out which debt payoff strategy works best for you and how our financial coaches can help you create a plan to pay off your debt, learn about our Eureka sessions here.