There are various different methods that are recommended for paying down debt. The most popular methods I have found are called Debt Snowball or Debt Avalanche. The guy who names these things must like snow or skiing or something. Who knows?
Basic analysis of your debt will show you that there are many methods to paying it down. You have to find the best way for you. The basic methods involve paying down debt by the lowest balance first, highest balance first, or highest interest rate first. Those are the basic ways to pay down debt.
Other debt pay down methods involve more complexity, like using a 401k loan or other personal loans. Don’t discount more complex methods, as they may work well for you. Do some research and learn how they work.
The debt snowball and debt avalanche methods focus on straight pay down of debt. Let’s look at what these two methods are and then what has worked for me, to start off with my debt pay down. Hint: I am using a hybrid method.
The debt snowball method is defined as paying your lowest balance debt first. You list all of your debts in balance order, from lowest to highest, and pay from top down. The idea is that you will build momentum from the excitement of paying off debt, keeping you focused on that great feeling of getting rid of debt.
The snowball is not the most cost effective way to pay down your debt, and will actually cost you more over time versus the avalanche. But don’t discount the good feeling associated with the snowball. Debt is a very emotional thing for most people and injecting a little positivity can only help.
The debt avalanche method is defined as paying off your highest interest rate debt first. You list all of your debts in interest rate order, from highest to lowest, and pay from the top down. The idea here is to pay off the most expensive debt in order, reducing your interest payments over the life of the debt.
On paper, the avalanche will save you the most money because you will pay off the most expensive debts first. I say “on paper” because real-life doesn’t always match up with theory. There are always curveballs in life.
However, the avalanche appears to be the most efficient method for paying down your debt. You save the most money over time on interest payments, and that’s a great thing.
I am a numbers person. I put numbers in a spreadsheet and obsess over the numbers. Analyzing, calculating, measuring.
I listed all of my credit card debts in a spreadsheet and did some quick analysis. I found that the interest rates were in a range, from 7.8% to 16%. The balances ranged from $1,500 to $13,500 on the various credit cards.
I chose a hybrid method for paying down my debt. First, I went with the debt snowball. I did that because I had two smaller debts that I could pay off quickly. That would give me the euphoria I was looking for with my debt, an actual good feeling for debt. I knew I needed that good feeling to help build some momentum.
In fact, it worked so well that I wrote a post about it on paying off two credit cards.
Then I planned to switch to the avalanche method for cost savings. I listed my remaining debts by interest rate, highest first, and plan to attack them in that order. That will give me bigger savings over time.
Down the road, I will look at using more complex methods. Maybe a debt consolidation loan for more savings. But for now, I am going from snowball to avalanche.
There are many ways to pay down your debt. The important thing is that you take steps to pay it down. Any method you choose is a good one, as long as it gets you started. Efficiency of debt pay down is another step. That’s where you decide which method works best for you…snowball, avalanche, hybrid, or more complex deals.
What debt pay down method do you like best? Which one has worked for you? Leave a comment and let me know.
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