By taking into account the interest rate and amount of debt, debt stacking identifies a way for you to pay off your debts. You begin by making consistent payments on all of your debts. The debt that debt stacking suggests that you pay off first is called your target account.
When you pay off the target account, you roll the amount you were paying toward your next target account. As each debt is paid off, you continue this process. Debt stacking allows you to make the same total monthly payment each month toward all of your debt and works best when you do not accrue any new debts.
You continue this process until you have paid off all of your debts. When you finish paying off your debts, you can apply the amount you were paying towards your debt toward creating wealth and financial independence!
How to Use Debt Stacking to Pay Off All Your Debts
Debt stacking, or debt avalanche, is a method of accelerating your debt repayment. To use debt stacking, follow these steps:
01
Make a budget
How much money do you make per month? What are your expenses? Make a list of all your monthly payments, from your electricity and phone bills to your credit card and student loan payments. Compare your debts to your income.
02
Stop making more debt
Stop using your credit card, do not take out personal loans, and find other ways to avoid small additions to your debts. This will help you focus on the larger debts, like car payments or student loans.
03
Make a list of your debts by size
What are your largest loans? Your mortgage, small business, and student loans are likely to be at the top of this list.
04
Make a debt list by interest rate
Even lower credit card debts can balloon into much larger amounts due to high interest rates. Look at the interest rate on each loan, and make a list with the largest interest rates first.
The Pros and Cons of Debt Stacking
Using the debt stacking method to pay off your debts is mathematically the best approach for most people. Debt stacking considers all your debts based on risk rather than principal size. However, it does not always lead to the same level of happiness as other approaches.
People who benefit from debt stacking or debt avalanche prefer this approach because you save as much money as possible on interest payments. With other approaches, like debt snowballing, you might feel more successful by paying off smaller loans first, but you could end up paying more money over time on interest.Focusing on higher interest rates with the debt stacking method means you pay off interest faster regardless of the size of the loan. You can save hundreds or thousands of dollars through this method. Since credit cards and car payments tend to have higher interest rates than student loans, you can continue to use student loan interest payments as a tax write-off, which can save you even more money.
With debt snowballing, you pay off debts faster because you focus on the smaller ones first, which can lead to a sense of accomplishment. In comparison, the debt stacking method means you focus on grinding away at the larger debts, so you may not feel rewarded after each payment.It could take longer to pay off larger debts with higher interest. When you do pay off those loans, more of your money will be freed up, so you can pay down your debt with the next highest interest rate.
