Debt Tackling Strategy

There are two proven methods when it comes to tackling debt for personal finance. The strategies are the snowball and avalanche method. The debt snowball method is a four-step approach to reducing debt made popular by Dave Ramsey, who claims momentum, not math, is the key to eliminating debt.

Snowball

This method focuses on paying down your smallest debt balance before moving on to larger ones. The snowball method is all about building momentum as you pay off debt. It may be a good solution to better manage your finances over time.

A. Step 1: Create a list of all of your debts, excluding your mortgage. Sort the debts in order from the smallest to largest balance.

B. Step 2: Each month, pay the minimum amount on each balance, except the smallest bill. Put as much cash as you can toward that one. You’ll want to review your budget and figure out how much money you can put toward your smallest balance without jeopardizing the rest of your finances.

C. Step 3: After you’ve paid off the smallest balance, roll the extra money you were using for that balance into the monthly payment for the next smallest balance. Of course, you have to continue making the minimum payments on all other debts to protect your FICO scores.

D. Step 4: Repeat this process until all of your debts are paid

There are advantages and disadvantages to this method. The primary advantage of the snowball method is the mental boost. When you see debts disappearing, it’ll increase your motivation to continue to move forward. Even paying off the small balances will boost your confidence and keep you focused. This strategy will also help you get a better handle on your finances and stress.

The biggest disadvantage of the snowball method is the potential for paying more money in interest over time, rather than if you used another debt-repayment method. Since the debt snowball method focuses on the smallest debt balances rather than the balance with the highest interest, your costliest debt may get paid off last.

Avalanche

The debt avalanche is a method that suggests you pay as much as possible toward your highest-interest debt while making minimum payments on the rest until all your debt is paid off. If your high-interest debt is weighing you down, this could be a good solution to becoming debt-free. Mathematically, the debt avalanche is known as a more efficient, cost-effective, and often faster way to get out of debt than the snowball approach.

The avalanche method prioritizes paying off your debt balances with the highest interest rate. You begin by paying your highest interest debt balance first. Once you eliminate that balance, you take the funds you’d been using for those payments and put them toward your next highest-interest balance. The idea is to repeat this process until all of your debt is paid off. This method helps you save money by getting rid of the costliest debt first.

A. Step 1: Review your budget and determine how much additional cash you can put toward your debt

B. Step 2: Make a list of all of your balances. List them in order of highest to lowest interest rates. Be sure to note the current minimum payment required for each balance.

C. Step 3: Make all minimum payments on your balances and put any leftover money toward the balance with the highest interest rate.

D. Step 4: After the balance with the highest interest rate has been completely paid off, move on to the next-highest-interest-rate balance.

E. Step 5: Repeat this process until all debts are paid.

Just like the above “snowball method,” there are advantages and disadvantages to the avalanche method. The debt avalanche method can help you save money on interest. If you have large debt balances with high interest, this could be a great strategy to help you save the most money.

In Theory…

It’ll make the most sense to select a debt repayment strategy that’ll save you the most money. But sometimes paying off debt isn’t just about the numbers. There are psychological factors that may play a role in the success of any method. According to the Association for Consumer Research, some people have more success if they focus on smaller balances. Every time a debt balance has been paid, you feel a sense of accomplishment. This will help motivate you to stick to your strategy. Repaying small balances fuels the commitment to keep up the good work.

Additional ways to pay off debt

A. Open a balance transfer credit card, move the debt to the new card (BT cards come with a promotional 0% APR period), and avoid additional interest by paying off the debt(s) during that period.

B. Borrow against your life insurance

C. Borrow from family/friends

D. Take out a personal loan

E. Borrow from your 401(K)

F. Renegotiate terms with creditors