2 Strategies For Paying Off Debt
2 Strategies For Paying Off Debt
There's some debate among monetary planners as to the bestmethod to pay down debt. Some say paying the highest interest rate debt first is the best way while otherssay paying the smallest balance initially is the very best way.
Both techniques have advantages and disadvantages, so this article will take a take a look at both, and assist you to decide which technique is greatest for you.
Technique #1 - Highest Interest Rate
In this method, you focus on paying off your highest interest rate debts first. The fundamentalprincipals in this techniqueconsist of:
1. Listing all of your debt by interest rate, from the highest interest rate to the lowest interest rate.
2. Commit to paying the minimum payment on every debt.
3. Decide how muchextracan be applied to the highest interest rate debt.
4. Pay the minimum quantity plus the extraamount towards the debt with the highest interest rate until it is paid off.
5. When that debt is paid off, apply the quantity you had been paying to the debt that is just been paid off to the next highest interest rate debt until paid off.
6. Repeat until all debts are paid in full.
This method is the very besttechnique mathematically, as you will pay less interest in thelengthy run.
Technique #2 - Lowest Balance
In this technique, your focus is on the debt with the lowest balance. Note: this technique is frequentlyknown as the Debt Snowball method. The basicsteps in this techniqueconsist of:
1. List all debts in order from the smallest balance to the largest balance.
2. Commit to paying the minimum payment on each debt.
3. Decide how muchadditionalcan be applied to the smallest balance debt.
4. Pay the minimum amount plus the additionalquantity towards the debt with the smallest balance until it's paid off.
5. When that debt is paid off, apply the quantity you had been paying to the debt that is paid off to the next smallest balance debt until that one is paid off.
6. Repeat until all debts are paid in full.
This techniquemay not be the very bestmethod mathematically, as you'll pay more interest within thelengthy run it takes to pay debt off. However, this methodallows you to pay smaller debts off quicker, which may give you the motivation you need to stick to your debt payment plan.
So, which method is greatest for you? It depends
Technique #1 is greatest for you if:
* You've debts with comparable balances
* You have discipline to stick to your debt repayment plan
* You are a numbers individual, and you realize the benefit of paying off the highest interest rate debt initial
Method #2 may be best for you if:
* Your debts do not have comparable balances - i.e., you've a $500 credit card balance, a $12,000 credit card balance, and a number of in between
* You need motivation - paying off the smallest credit card balance might be the motivation you need to stick to your debt repayment plan
* You do not mind paying more interest over the long run in exchange for obtaining rid of smaller balances initial
* You have a history of late payments -
Tip: Why not use a mixture of the two methods? Utilizing a mixture of both methodsallows you to really feel a sense of accomplishment by paying off that first debt (the smallest balance credit card), and gives you the motivation to start working on the next debt (the debt with the highest interest rate).
Remember, the method that works for you is the methodyou'llreally use. The most essentialthingwould be to make a plan and stick to it so you are able to live debt free.
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