Paying off debt is a very difficult task to achieve. No matter which way you slice it, it will take time and patience to cut your debt down to $0. Many people that have reduced their debt live by the two methods that are used most: Debt Snowball and Debt Avalanche. There are other methods our there, but these are the most common and practical methods. Not only are they widely recognized, but they also work. Choosing a debt reduction method for you comes down to how your mind works. Lets break down the two methods.
The Debt Snowball
The snowball is famously accredited to Dave Ramsey. This famous financial guru has figured out the method that works toward a person’s emotions. When starting the snowball method, you are asked to write down your debts in order of balance ascending. Here is an example:
Credit Card 1: $350
Credit Card 2: $900
Credit Card 3: $2000
Credit Card 4: $5600
To start the snowball, you must work on paying off the smallest balance first, while still paying the minimum monthly payment on the other debts. Once you pay off the first debt, you move onto the next one, using the money you would spend paying the first debt to add on top of the second’s payment. This action is what creates the snowball. Paying off a debt is a huge accomplishment and it helps build your confidence on being able to handle your debt reduction plan. This plan is all psychological.
As you pay off more debts, you can add more money to your monthly payment. The key to this plan as well as the avalanche is to pay more than the minimum payment on each debt you are working on at the time. Here is a nice break down if you have an extra $50 per month to add to your payment.
Credit Card 1 Minimum: $20
Credit Card 2 Minimum: $35
Credit Card 3 Minimum: $100
Credit Card 4 Minimum: $180
You would add the extra $50 to your 1st credit card minimum to make a total of $70 per month. Once that card is payed off, then you pay credit card 2 with the minimum payment, plus the payment from credit card 1. You would end up paying $105 each month on credit card 2. You would continue this until all your credit cards are paid off. Get started with the Debt Snowball Calculator.
The Debt Avalanche
This method is all about basic math. It does not deal with your psychological mindset. In order to start the debt avalanche approach, you would take your debts and list them by interest rate, descending. Let’s use the example cards from above, but add their interest rates.
Credit Card 1: $350 APR: 10.99%
Credit Card 4: $5600 APR: 8.99%
Credit Card 2: $900 APR: 5.99%
When you list your debts by interest rate, descending, you are effectively taking the shortest amount of time to pay off your debt. You are also going to save the most money in interest. When you take out the highest interest rate, you are effectively saving the difference in percentage rate from one debt to the next. You have to pay off the debt in the same way as the snowball, by adding any extra you have toward the payment, and then using your first debt payment on the second debt. You continue this until all your debt is paid off. This method makes the most sense financially and mathematically, but it will not work if you don’t have the will power to continue the debt reduction plan.
No matter which debt reduction plan you choose, you will have to have the dedication in order to reach success. I used the debt avalanche method when paying off my credit card debt. It allowed me to eliminate $50,000 in a little less than 3 years. It took a lot of patience and will power. I occasionally had to deal with large balances, so I had to stick with the plan. There were many times when I wanted to deviate from the plan, but I continued it and it felt great in the end.
Only you can choose which plan is right for you. Many people will tell you which plan is better, but it depends on how you connect with money and your debt. If you are emotional and need little victories, then the Snowball method would be best. If you a numbers person, then the Avalanche method would be your best option.
Try this great debt calculator, via unbury.me, that allows you to choose between the snowball or avalanche method.
Let me know which method you chose, or which one you plan on implementing when you start your reduction plan.