The number one struggle for many families. Whether it’s student loans, personal loans or mortgages, most adults have faced a form of debt at least once in a lifetime.
Here are few of best known debt payment strategies to look into:
The Debt Snowball
The term has been coined by Dave Ramsey in his famous The Total Money Makeover: A Proven Plan for Financial Fitness book.
The strategy is pretty simple:
- list all your debts
- order by balance (smallest to biggest)
- start paying off the smallest balance loans and then move up higher (while paying the minimum on all other loans).
This means that if you have 3 loans: 10K, 1K and 5K, you should be focusing all your efforts for the smallest loan (1K), then use the momentum (and extra money you’ll have each month, after paying off this loan) to attack the second one: 5K and then the 10K loan. (this is just an example to get the idea).
You should ignore the interest rates, just focus on how much you need to pay off and just do it.
It’s a really great strategy for someone who needs a push towards debt payoff, since it gives you a quick win, after paying the small loans, then you’ll use this spiritual (and financial) boost to pay off everything you owe.
Many people lack the discipline to just make those monthly payments and by tackling the smallest debt first it all seems less daunting.
It’s called the Debt Snowball, since it’s just like a snowball than goes downhill: after you pay your first debt, the money you now have each month available will go towards the second debt, making a bigger ‘snowball’, then the third one, until you are finally debt free.
The drawback is that, if you have a bigger loan with a bigger interest rate, you’ll ‘lose’ money each month, since you might be paying off the small interest debt first and not the one that ‘leaks’ the most money.
Anyway, it’s a really great tactic to use and a lot of people have been successful with it.
The Debt Avalanche
If the Debt Snowball strategy is not for you, let’s look int this one:
- list all your debts
- order them by interest rate: highest to smallest
- pay off high interest debt first and move to the smaller ones one by one
Mathematically, this is the better approach since this way you are minimizing loss you incur from your interest rates, by getting rid of the more costly loans.
Sometimes it’s all too overwhelming, so you might solve your financial problems by taking out a new loan that will help you pay off all the other ones.
The strategy is, thus, pretty simple: you borrow money to cover your debt and pay off the loans with this money. Then you diligently start paying off this new ‘final‘ loan.
If you are careful with all the additional taxes that might incur, this method would also help you get your money in order and become debt free.
No matter what solution you choose you do need to pay off your debt. Make sure you set aside money each month, be on time with your payments and work your way up to no more debt.