You’ve decided to take the bull by the horns and begin to pay off your credit cards and other debt. Good for you! Now that you’re committed to getting out of hock you’ve got two great options for doing it. We’ll talk about which might be better for you.
Today is the day, you’ve decided to take the step and begin earnestly to pay off your credit cards and other debt. Good job! We’ll talk about two ways you can accomplish this and which option is better for you.
For those of you that are regular listeners, you might have figured out that we are talking about the Snowball method of paying down debt, and it’s partner, the Avalanche method. Both of these methods are great, and whichever one you choose will help you get out of debt in a hurry. But, which method is best for you? And which one saves you the most money? If you’re new to these methods, let’s break them down.
Snowball method
First, you pay the minimum monthly payment on all of your debts. You might already be doing that, just because you have to. Then you apply any leftover money to the debt with the smallest balance. To be clear, that money is in addition to the minimum payment you are already making on that debt.
Once that debt is paid off, continue making the minimum monthly payment on all of your remaining debts, but you take the minimum monthly amount you had been paying for that first debt that you just paid off, plus any extra you may have each month, and pay all of that against next smallest debt. You continue this process until all your second debt is gone and then continue the process with the third debt, and so on. Just like a snowball rolling down a hill gets bigger and bigger, your payments will get bigger and bigger as each debt gets paid off. As long as you don’t reduce the amount you’ve been paying against debt each month as each debt is paid off, the snowball will continue to grow and you’ll be out of debt a lot quicker than you would think.
Using the Snowball method you are able to see your progress upfront. You can see those quick wins right away, which can be really encouraging. One other advantage is that you gain more and more money to use, which allows you to focus on larger and larger debts. Now, let’s look at the Avalanche method, which is similar but with an important distinction. Then we can determine which is best for you.
Avalanche method
Just like the Snowball method, you make the required minimum monthly payments on all your debts. However, instead of taking your extra money and putting it towards your next smallest balance, you take it and put it towards the debt with the highest interest rate. When that is paid off you take all the money you were paying toward that first debt and apply it toward the debt with the next highest interest rate. The difference is more than just lowest balance vs. highest interest rate because you won’t get that psychological boost right away. That said, the momentum does build with the avalanche method. As you come to the end of your debts you will again have a lot of cash available while taking big chunks out of what you still owe.
So, which method is best for you? Answering this will depend on your individual needs and what things you need to see to give you encouragement.
If you’re the type of person that needs to see progress more quickly, the snowball method is best suited for you, because the smaller debts disappear sooner and you’ll see results more quickly.
However, if you’re content waiting to see debts disappear completely even though the balances do go down each month, and if paying the least amount overall in interest is more important to you, then the avalanche method is for you.
Studies have shown that the best approach is the one you’re more likely to complete, and for many, that turns out to be the Snowball method. They respond better seeing the smaller victories first because if they become discouraged and quit because they didn’t see much progress, which can happen with the Avalanche method, they won’t end up see those interest savings anyway.
On this program we also answer a few of your questions:
I currently have $51,000 in a variable annuity. I currently have two mortgages, one totaling $45,000 and the other $21,000. Should I withdrawal the money from my annuity to pay off the $45,000 mortgage and either leave the remaining $6,000 in the annuity or move it into a different savings account?
I want to start investing, how do I know which financial service company to choose?
I currently have $100,000 in a 401K. My mortgage debt is $99,000 and I have $11,000 in credit card debt. Should I withdraw half of my 401K to put towards my debt?
I received an inheritance and used that money to pay off my mortgage. I have around $50,000 left, what should I do with the remaining?
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