Debt repayment is key to financial freedom. It can be overwhelming to be in debt. If you’ve had enough of all that stress and you’re trying to build a budget that tackles your debt, it’s important to find a strategy that keeps your debt in check while you also pay your other monthly bills.
By using these debt repayment strategies, you can take control over your debt, know you’re paying it off and reduce your interest payments.
The Debt Snowball Method
This debt reduction strategy involves paying off debt with the smallest outstanding balance first, then paying off larger debt. After the smallest debt is fully paid off, you roll that payment into the next smallest debt.
This method can be effective if you have several small debts to repay, or if you need motivation to pay off a lot of debt.
The steps involved in this method are:
Step 1: List your debts from the smallest balance to the largest
Step 2: Make minimum payments on all your debts except the smallest
Step 3: Pay as much as possible on your smallest debt
Step 4: Repeat until each debt is paid in full
The Debt Avalanche Method
Debt avalanche, or debt stacking, occurs when you pay off debts in order of interest rate, regardless of balance, from the highest to the lowest.
With the debt avalanche, you will pay less interest and will get out of debt more quickly. In addition, you will have the satisfaction of watching the highest interest rates disappear first.
The steps involved in this method are:
Step 1: Prioritize all debts by interest rate, starting with the highest
Step 2: Pay as much as you can on your high-interest debt first, while paying the minimums on everything else
Step 3: Once you have paid off the first balance, move on to the next highest interest debt
Step 4: Work your way down to the debt with the lowest interest rate until each debt is paid in full.
Final Thoughts
When your debts are paid, you can shift your attention to saving and investing so that you can reach your other financial goals. When you’re drowning in debt, you might feel that there is no way out. If you use the strategies above, you will eventually be able to break free from debt. What method is right for you is something only you can decide.
Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.
— Ogden Nash