What are the 3 biggest strategies for paying down debt?
Have you ever wondered how people take control of their debt? I know I have. There will always be bills. And bills need to be paid. Here are 3 of the best strategies on how to pay down debt without loosing your mind...or worse your wallet.
Snowball Method
The Snowball method for tackling debt basically focuses on the amount of total debt you have and paying that down as a priority. This was popularized by financial guru Dave Ramsey - no, not the chef. It involves paying off your smallest debt first and then working your way to the largest debt.
In a nutshell...
- Make your monthly minimum payments on each of your debts
- Make extra payments on the smallest debt
- Once paid off, move on to the next smallest debt ending with the largest debt.
The largest benefit for this method is that it works by just modifying your behavior. The small wins are great motivators to keep you going until you've cleared out all your debts. This is my personal favorite.
"Personal finance is 20% head knowledge and 80% behavior."
Dave Ramsey
The largest disadvantage would be that this method can cost you a lot more money in interest fees since it only takes the balance into account. You can end up holding to debt with the highest interest rates the longest.
Avalanche Method
The Avalanche method for tackling debt basically focuses on your debt with the highest interest rate and paying that down as a priority unlike the Snowball method which focuses on the debt balance. Paying off your debt with the heaviest rates quicker allows you eventually put more money towards the principal of their loans.
In a nutshell...
- Make your monthly minimum payments on each of your debts
- Make extra payments on the debt with the highest interest rate
- Once paid off, move on to the next debt with the highest interest rate ending with the smallest.
The largest benefit is that this method can save you a lot of money from interest fees.
The largest disadvantage is that it requires quite a bit of self-motivation to keep paying down the debt without seeing much progress.
Debt Consolidation
Debt consolidation is more about putting all your debt together so you can just make one payment as opposed to multiple payments. This saves interest and stress BUT requires another loan that pays off your secured or unsecured types of debt. Once consolidated using the loan you then just pay that one loan as opposed to several. This method may work for you or not. For example, if your credit score is already tapped out the interest rate you get for this debt consolidation loan may not make it feasible.
As always make sure to do your own research and always consult with debt and financial professionals to get more information on how to take control of your debt. These methods can be interchangable and factors liek personality and lifestyle would play a role in determining which works best for you. Hope this helps you in your path to financial freedom and being debt free.