How to Pay Off Debt Fast: Debt Avalanche vs. Debt Snowball
Are you looking for an easy way to pay off debt? The road to financial freedom is not always easy. However, if you practice excellent budgeting skills and find a more natural approach to pay off debt, you can get out of a financial mess.
If you are wondering how to pay off your loans without putting a dent in your monthly budget, here are a few proven ways to help you get rid of your loans.
Set up a Budget
Creating a budget is not enough. Sticking to your budget makes sure you pay your mortgage and other payments regularly. Many apps and online tools can help you create a budget according to your expense and saving goals. Regardless of your budget, there is always room for savings and investments. Small steps like these go a long way in paying off your debts ultimately.
Setting up and managing your budget can be as simple as creating an excel sheet on your home computer. However, if you find yourself stuck in a severe financial mess, you may need professional help from a financial advisor.
Calculate your Debt
Calculating your debts will give you a fair idea of how you can pay them off. Invest some time and research to figure out all types of short-term and long-term liabilities. Do you have to pay your monthly home mortgage or auto car loan? How many credit cards do you use, and how do you plan on making regular credit card bill payments?
Although it’s a scary thing to do, the first step to paying off your debt is knowing where you currently stand. Only then can you take the steps needed to get rid of your financial burden.
There are two popular methods to pay off debt quickly: the debt avalanche method and the debt snowball method. While both debt management strategies help you get rid of your loan, both ways have their pros and cons. Both methods require that you make minimum payments on each of your debts without focusing on a single debt. Naturally, for that, you will have to list and calculate your liabilities.
Debt Avalanche Method
This method requires that you make minimum payments on your debt and use your remaining finances to pay off the most expensive debt with the highest interest. When you choose the debt avalanche method to pay off your debt, you can save the most money in interest payments.
For instance, if an individual has an additional $3,000 to contribute to his debt-repayment plan every month, this debt management method will make his money go the furthest.
Let’s suppose you have to pay the following debts:
• student loan debt: $15,000 at 4.50%
• car loan debt: $9,000 at 3.00%
• credit card debt: $10,000 at 18.99%
If you were in such a scenario, you would be able to pay off your credit card debt first, using the avalanche method. The remaining part of your money would go into paying off other debts in 11 months.
When you switch the order of your debts, you can save a significant amount of money in interest payments. If someone has substantial debt, this method will reduce the time it takes to pay off their debt.
Another tested strategy to save time and money, the debt snowball method, is the best choice when you need more dedication to stick to your payment plan. The most beneficial aspect of this strategy is that it keeps building the motivation you need to close your debts.
Through this method, you focus on the smallest debts. This way, your small debts get out of the way before you move on to your most significant debts. That’s the best way to keep on paying your monthly bills, especially when it happened to miss your payments. The debt snowball method guarantees instant progress, and you can pay off your debt within a few months, provided you follow the basics of this strategy: make regular and consistent payments.
Which method Should you Choose?
Now you know the basics of both financial strategies to pay off all types of debts. In the snowball method, you focus on paying off the smallest debt first, without focusing on the interest rate and work your way up. However, with the debt avalanche method, you pay additional money to pay off the debt that has the highest interest rate.
Tackling your debts is one of the most challenging battles you will ever come across in your life. Analyzing your financial situation and debts helps you choose the best method.
Some people like using a combination of both methods by switching payments. For instance, if you were to pay the debts we mentioned above, you may choose to pay off your credit card debt first and pay off the car loan next instead of paying off your student loan.
Apart from your credit card score, your DTI ratio or the debt-to-income ratio is a crucial part of your overall debt payment strategy. There are many ways to calculate your DTI to evaluate how comfortable you are with your current debts.
Since both the debt avalanche method and the snowball method aim to help you regain financial control, using specialized calculators can help you choose the right method. The income to debt ratio allows you to analyze how much money you can quickly put aside to make monthly loan payments.