You have reached the second installment of the American Consumer Debt Series. This section will focus on the concept of the best ways to pay off debt.
What Are The Best Ways To Pay Off Debt?
As you learned from our first article that outlined the facts about consumer debt in America, just about every person in this country has some form of debt. Even if you don’t own a home, don’t own a car, have never had any higher education, it’s still highly likely you owe some form of debt.
Maybe it’s from a credit card or two. Maybe you owe money to predatory payday loan companies. There’s also a good chance that you’re underinsured and might have some unpaid medical bills.
Regardless of how or why you have debt, the three strategies below have become some of the most effective ways for consumers to pay off debt.
Debt Snowball: For those barely staying afloat.
If you’ve been searching the web for debt payoff strategies, you may have come across people suggesting that you use the debt snowball method. For those that have never heard of it, we’ll give you a quick rundown.
Picture yourself making a snowball. You want to make that snowball bigger, so you start rolling it around in the snow so that it gathers more snow quickly and starts to grow in size rapidly. That’s the same imagery you need in your mind when paying off debt using the debt snowball method.
How to use the debt snowball method: Make a list of your debts from smallest to largest. If you paid the absolute bare minimum on each of these debts, how much extra could you afford to pay on the smallest debt on your list?
You pay the bare minimum on every one of your debts. Anything extra you can afford should go to the smallest debt. Because it’s the smallest debt and because you’re hopefully paying a little extra on it, the debt will pay it off faster than the other debts.
Once this smallest debt has been paid off, you take however much you were paying on that debt and add it to the monthly payment you were making on the next smallest debt. Once that one is paid off, you roll it into the next debt on your list. By the time you reach the last debt, you will have amassed a monthly debt payment that has snowballed into a fairly decent size!
Debt Avalanche: Great For High-Interest Debts.
For those who aren’t necessarily having trouble paying their debts but need a good attack plan, this may be good for you. The debt avalanche has got the same idea behind it as the debt snowball payoff strategy.
You start by listing your debts again. Except rather than list them smallest to largest by the amount owed, you list them by their interest rates, starting with the debt with the highest interest rate (probably a credit card).
You pay the minimum on all of your debts and hit that debt with the highest interest rate as hard as you can. Once that debt has been paid off, you roll the payments into the next highest rate. Rinse and repeat. You will not see results as quickly as with the debt snowball, but you will likely save much more money over time as you knock out the higher interest rates first.
Debt Snowflake: A Little Extra Makes A Difference!
Are there any changes you can make throughout your daily, weekly, or monthly routines that might save you a few bucks here and there? Getting a medium-sized coffee instead of a large one might save you $1.20 per day. Buying store-brand bread might save you $7 per month.
These little savings are like snowflakes. It doesn’t seem like much by themselves, but those two examples above work out to be about $400 per year extra. A few more snowflakes could have you at $1,000-$2,000+ extra before you know it.
With the debt snowflake, you take these little bits of savings and each month to add them to your debt payments. This method works amazingly well when used with the debt snowball and the debt avalanche.
Still, Need More Debt Help?
If you’re struggling even to make the minimum monthly payments, then you may want to check out our next installment: Debt Consolidation and Debt Restructuring.
Read >> Part 3: Consolidate or Restructure?
Go Back >> Part 1: The Facts
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Great starting point for debt reduction