Best debt reduction strategies – 3 approaches to take NOW

In earlier articles, I have shown you how creating an Emergency Fund and developing an entrepreneur mindset can give you the much-needed mental boost on your journey to financial freedom. An emergency fund gives some backup to life’s little hiccups. An entrepreneur mindset makes sure that you remain in the right frame of mind to succeed.

So now that you have a little cash set aside and the willpower to keep moving toward financial freedom, let’s take a look at the best debt reduction strategies to wipe out your debts.

Spend less or earn more

We have already spoken about the formula for achieving financial freedom; spend less than you earn. Now, my philosophy is that the best way to do this is to earn more money rather than having to budget and live a frugal lifestyle. But, some of you may have a different take on life and may be willing to live on less.

Either way, to cut your debts, you need more money to help pay them off as quickly as possible. Only then can you start saving and investing your way towards financial freedom. Here are 3 strategies which I would like to present to you:

  • Pay off your highest interest rate debt first
  • Pay off your smallest debts first
  • Pay of your debts with the highest emotional baggage first

Let’s look at the pros and cons of each of them individually.

1. Pay off high interest rate debt first

credit cardsWith this method of debt reduction, you need to list all your debts from the highest interest rate to the lowest interest rate. You then start paying the minimum amount on each of your debts and contributing as much as you can afford to the debt with the highest interest rate.

After you have paid off your highest interest rate debt, take that payment and add it to the payments you were making on the debt with the next highest interest rate. Continue to make minimum payments on the remaining debts. Rinse and repeat until all your debt has been paid off.

By using this method of debt reduction, you pay off your debts with the highest interest rates first, so this method will save you the most in interest payments. This means that you will pay off your debts in the shortest time.

However, if your high interest rate debt is large, it will take longer to pay off the individual debts and this may discourage people from continuing with the strategy.

2. Pay off the smallest debts first

Another approach to reducing your debt is to list your debts from the smallest to the largest balances. Then, use the strategy as above and pay the minimum amount on each debt and contribute as much as you can afford to your smallest balance. After your first debt is paid off, take that payment and add it to the payments you are making on your second debt. Again, rinse and repeat until you are debt-free.

This method of debt reduction is good if you are the type of person who likes to see their individual debts being paid off sooner. It can be emotionally fulfilling to see the number of debts reducing.

The downside of this method is that debts with high interest rates won’t be paid off until later. This means you will pay higher interest rates for longer and, therefore, your total debt will take longer to pay off. Maybe you want to think about a combination of these two approaches!

3. Pay off your emotional debts first

This strategy for debt reduction is a little more radical than the last two methods. With this method, debts are listed in the order of their emotional impact on you. For example, you may want to pay back a family member who gave you an interest-free loan because of the emotional baggage attached to the loan. Or pay back a friend who lent you money when you “left your wallet at home”!

The strength of this method is that it allows you to reduce the psychological stress caused by borrowing money from people close to you. By removing these debts first, you will feel motivated to continue paying down your remaining debts.

By not paying down the highest interest rate debts first, this method also means paying more interest and taking longer to pay off your debts than using the previous strategies. Also, allowing your emotions to rule your debt strategies is probably what got you into this mess in the first place!

How do these debt reduction strategies stack up?

Here are the results of running the following example through a spreadsheet that is available here.


  1. $8,000 student loan, 5.00% interest, $85 minimum payment
  2. $2,000 credit card, 25.00% interest, $70 minimum payment
  3. $25,000 credit card, 17.00% interest, $620 minimum payment
  4. $5,000 auto loan, 5.00% interest, $95 minimum repayment
  5. $3,000 loan from family, 0.00% interest, no minimum repayment

The total minimum monthly repayments would be $870.

Now, let’s assume we can contribute $1,000 per month to use towards debt reduction.

  • If we use the strategy of paying off the highest interest rate debt first, the total debt would be repaid in 55 months and the total interest paid would be $11,767.
  • If we use the strategy of paying off the smallest debts first, the total debt would be repaid in 58 months and the total interest paid would be $14,299.
  • If we are emotionally attached to the loan from the family and then paid off the remaining debt starting with the highest interest rate, the total debt would be repaid in 58 months and the total interest paid would be $14,260.

You can see that the most cost-effective way to pay off your debt is to pay off the highest interest rate loans first. By using this strategy in the example above, the total savings in interest payments is around $2,500. The total debt would also be paid off 3 months earlier, allowing you to divert your monthly repayments (which you no longer have!) into your savings and investments.

By using a debt reduction strategy and increasing your earnings through a side hustle (which will allow above monthly minimum repayments), you can become debt-free. It will take commitment and may be emotionally challenging, but you can do it.

So, make the decision now. Challenge yourself to become debt-free as quickly as you can.

How long will it take? Only you and your new-found mindset know the answer.


Was this helpful? Share it with your friends. After all, they also deserve the fine things that life has to offer.





  1. This is a good strategy to clear all your debts, but I must say the debt with the highest interest rate is the hardest to pay. High interest rate means either high repayment amount needed or longer period of payment. Do you think it is a good thing to advise one to negotiate for a reduction of the interest rate and increase the period of paying as a way of managing the debt better.

    Clearing the emotional debts for me would take first priority, it is always good to be in the right track with people who are most close to you for you never know when you need their help next.

    • Hi Anita,

      Thank you for your comments. Sometimes it is the smaller debts that carry the higher interest rates (I am thinking payday loans), so there may be opportunities to pay them off first and still have the emotional joy of getting rid of one debt. If you can negotiate a lower interest rate, that is great. Just be aware that this may impact your credit score so talk to the lender about this first.

      I am like you and would always pay my family first. If things go from bad to worse, you really do need them on your side.

      All the best with your finances,


  2. I love the idea of using the three strategies of paying off debt, as for me, I would love to pay the debt with the highest emotional baggage first, because I am more stressed when I owe a relative or a friend money, paying such debts brings a lot of relief to me. 

    In my scenario, I have managed this, but there is one outstanding debt that I will need to fight tooth and nail to finish.

    However, my finances are very limited that I have very limited routes I can take to cancel it in a shortest period possible . 

    The debt is running till  January 2021. Its frustrating me, I can’t do anything because of it.  

    • Hi Ngonidzashe,

      Thank you for providing some feedback to my article. If you have one particular debt that you really need to pay back, pay it first and then pay back any others from highest interest rate to lowest. This will minimize the amount of interest that needs to be paid. If your finances are limited, I would encourage you to read some of my other posts relating to setting up an Emergency Fund and using a side-hustle to bring in extra income.

      All my best wishes and hope you can become debt-free soon.


  3. Thanks for these tips, they really make sense.

    Of course is my first focus on earning more but at times this option is just not realistic. Then it is definitely the best to pay back not your family’s depth first but the most expensive one.

    A 25% interest rate I thought was rather high, in Switzerland this would not be allowed. Here in Thailand I learned a fully new system, private credits, they take 5% a month which is 60% in a year.

    I had one of those once and you bet I hurried up paying that one back first.

    In case of depth from friends I would ask for time, communicate, that if I’d pay them first it would double the small depth I owe them.

    Sometimes Talking helps, not always though.

    • Hi Stefan,

      Thank you for your comments on my article. Paying back family debts may not be the most cost-effective strategy but many people feel guilty when they owe money to family. They feel much more comfortable owing money to banks or department stores.

      The interest rates on credit cards being used by people with lower credit scores is really staggering. According to Creditcards.com this week, “of the 100 cards included in the weekly rate report, 39 now advertise maximum APRs above 25 percent”.

      Check you cards carefully before using them for purchases that cannot be immediately paid back!

      Best wishes,


  4. Hello,

    The information in your article is very relevant and informative for our times today. Getting out of debt is on the minds of millions. In today’s economy, everything is so expensive you have to go into debt just to get the things you need. Prices go up, wages pretty much stay the same, not a winning combination. Your debt reduction strategies from your 3 approach plan is very doable, and I clearly understand the concept, why didn’t I ever think of handling my heavy debt situation like that. I never knew such a plan existed. I have never heard of the term “emotional” debt, but after your explanation of it, I was very much familiar because I currently have a least two of those types of debts. It’s true about how it messes with your psyche. I am going to address my emotional debts as soon as possible now that I know what it is and how I should handle them.

    Thanks for the education, I feel like it is possible to be free of debt. I have a plan now, thanks to your very informative debt reduction information.


    • Hi Dwilli and thank you for your comments. I hope you can use these strategies to reduce your overall levels of debt. Emotional debt is really hard to ignore as you feel like you have let down your family or friends if you cannot pay them back. I would recommend that after you pay back your emotional debts, repay your remaining debts beginning with the highest interest rate debt first. Make a plan, stick to it and you will pay down all your debt.


  5. This is actually a great website with a great article. I just bought a new house and of course now I have a lot of debt to pay off. This article guided me through which one I should pay off first and why I should pay them first. It had a good reason for paying certain debts first.

    I am going to definitely follow this strategy. Thank you so much for sharing this article with us.

    • Hi Sujandar,

      Thank you for your comments. With housing loan interest rates at record lows, you still need to be careful and monitor rates as you pay down your higher interest rate loans. Although the repayments may be low, they can increase quickly if interest rates rise.

      Try to pay off your other debts as quickly as possible (if they are higher interest rate loans) so that you can focus all of that additional income on the house loan.

      Wishing you much success in reducing your debts.


  6. Hi Gary! Thank you very much for your interesting approach to become dept-free. I agree with you: paying off high interest rate debt first is a logical step, but paying off the smallest debts first really has a psychologically powerful effect.

    I appreciate the example you have laid here. For me, I think the best path is paying off high interest rate debt first. Thank you very much for helping me put things into perspective.

    • Hi Henry and thank you for your comments on my article.

      If the repayments on your smallest debts are small, I would still consider paying them off quickly, just so that they are gone and the number of debts you have is reduced. With interest rates set to rise, reducing the number of debts you have can be even more psychologically empowering.

      Quite often, the small debts have the higher interest rates, so it can be emotionally and financially beneficial to pay them off first.

      I am glad you have a new perspective on debt reduction. Best wishes for 2019 and beyond,


  7. One thing I know you should always pay those emotional Debts because you might need them again and you don’t want to create enemity with your relatives due to money. banks loans can be paid later for they have   fixed interest  the problem is the loans that have compound  interest that is a  very dangerous loan and should be repaid very fast

    • Hi Charles,

      I agree with your comments. When the proverbial s%#t hits the fan, you need to be able to go to your family and friends for assistance. If you have already destroyed that relationship through poor money choices in the past, where do you go?

      The banks have stricter lending policies than family, so the chances of credit there are even worse.

      I can only recommend that if you have “emotional debts” and you are struggling to pay them, talk with your family/friends and explain the situation. Ignoring the loan or hiding from them because you cannot repay a loan will not make them go away.

      Take responsibility  and come to a mutually agreeable solution. Then, if things deteriorate, at least you are still on talking terms.

      Compounding loans can be dangerous but, if they are repaid based on the interest rate and in the order dictated by the strategy you choose, they can still be effective. Remember, having no loans is still the best strategy. If you need to take out a loan, determine a repayment plan before you sign the loan document. Ensure you can repay it first!

      Best wishes for your financial future,


  8. There are several good strategies you have shown.

    I also agree there is one thing people usually pay off much quicker than any other debt, it is the emotional debt.

    I know because when I was younger I had to take some financial help from my late Father, and he also was a strict person in many ways. Therefore, I had to pay him off as quick as I could to repay everything he had given me.

    Today, by reading your article, I would go with the one who has the highest interest.

    Your article is very valuable and in need of much help to everyone these days.

    Here in Canada, they had investigated that the average person carries a debt of CAD $ 20000, this was quite a shock to me to read this.

    Not sure though how it shows in other western countries? How is the debt rate of the average person in Australia?

    Just curious to know, thank you.

    • Hi Sylvia,

      Thank you for taking the time to respond to my article.

      Emotional debt is very difficult for most people to handle. That is the reason why paying off emotional debt first is one of the strategies, even though it probably shouldn’t be if you base it purely on interest rate repayments. But, we all know that family and friends come first (regardless of the interest rates!).

      I know Australian household debt is high so I checked the Australian Bureau of Statistics website. Australia ranks fourth highest in the world for household debt as a percentage of net income. If you include home mortgages, the average Australian household owes around $250,000 (2016 figure). Now, most of that debt is currently offset by strong housing prices, but that can change in an instant.

      Rising interest rates or falling house prices could lead to a devastating credit crisis in Australia and many other countries. Review your debt levels while interest rates are relatively low and plan a strategy to reduce debt. Your bank balance and personal health will thank you.


  9. I like the method you are using to help the readers to off-set the debts. Debts can build up unnecessary stresses burdening your and suppressing your progress in life. I would encourage people to live a debt free life just like myself. 12 years ago I had that experienced and didn’t want to go back there for my personal life and family. But for my business I would treat it as a different entity. If I fall into the debt trap, i will remember your strategy. Great article.   

    • Thank you for your kind comments.

      You have made the best financial decision by living a debt free life. Instead of repaying debt, use the money to save and invest for your future and future generations.

      Great effort,


  10. This article is about the strategy, for the best and quickest way, of paying off our debts. 

    Of course the best way, is to spend lees than we earn in the first place,having said that, lets see what his proposals,are.

    The author gives us 3 ways of achieving this.1/ Pat off the highest interest rate debts first.2/ Pay off the smallest debts first.

    3/ Pay off the debts with the highest emotional baggage first.

    Number one method means that you will save the most in interest,

    Number two method is good, as you will see the number of debts reducing faster. However the interest on the higher rated debts will keep on piling up.

    Number three has the highest emotional release, as you pay off debts to family and friends.

    The most Cost Effective way, is to pay off the highest interest rate debts first,which would also be the quickest.

    We are challenged to become debt free as soon as we can, which will give us peace of mind financially.

    • Hi Robert,

      Thank you for your comments.

      You have summarised the 3 methods and the pros and cons exactly. Yes, the best and quickest method is to pay off the highest interest rate loans first. But, sometimes the emotional debts are the hardest to put off.

      Only you can decide the strategy which best suits you. Any strategy though is better than having no strategy.

      Become debt free and forget debt-reduction strategies forever!

      Best wishes for your financial success,


  11. Hi Gary – this is a great article that everyone with debt should read. I was brought up with a ‘if you cant afford it don’t buy it’ mindset and have had very little debt. If I wanted something I’d save up for it and could often get a discount for cash. Double win! I know that’s not always possible in this day and age but most of my friends have credit card debt simply because they wanted things and weren’t prepared to save for them. For that they end up paying 25-30% more! I have two friends who booked a luxury holiday on their card at 49%! Crazy!

    I have another friend who has a reasonable income but he buys everything on his credit card and pays the minimum off each month at about 9%. He knows he’s paying over the odds for stuff but likes to ‘budget’ this minimum payment each month. I’m sure he thinks he’s getting a good deal somehow 😱

    So its’ great that you’re encouraing people to get rid of their debt!

    Here’s another trick which may be possible. Some credit cards offer 0% interest for so-many months if you transfer your balance  to them from anothercard. That can really give you a massive boost.

    Your example  payment options are brilliant. Even using the best method, it shows you’d be paying over 27% more for stuff than need be. As the saying goes: what is robbing a bank compared to owning one?

    I hope people read this and take action.Ian

    • Hi Ian,

      Thanks for giving up your time to respond to my article.

      Everything you say is so true. And great examples you provide.

      Your idea of using balance tranfers between credit cards is agreat way to minimize repayments but the better solution is to get rid of the credit card debt using one of the debt reduction strategies.

      Please pass this article on to friends and colleagues if you think it can help them.

      Wishing you a debt-free future,


  12. Very timely article Gary,

    I started New Year with a huge debt already and honestly, it doesn’t feel good. When people enjoy and celebrate, I was working harder so that I could earn more and pay off my debts. Paying family is important but I agree paying the high-interest rate should be the number one priority as that interest we’re paying is the amount of money we are losing which means more money that we are giving them for free.

    I know this sounds a bit mad but is it advisable if I take in a low-interest loan to pay off my high-interest loan? That way I’ll still be paying but at a lower amount.

    • Hi Riaz,

      Thank you for your comments.

      It is admirable that you were working harder to pay off your debts over the festive season. Use the strategy of paying off high interest loans first if you can do that.

      If you can transfer your high interest loan to a lower interest rate and maintain the same repayments, you will pay out your loan earlier. Just be aware that new charges may be incurred when you establish a new loan and this may offset any advantages of the lower interest rate. Read the fine print carefully!

      I hope you use one of the strategies and become debt-free in the near future. Best wishes,


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