For many people, getting out of debt is one of life’s challenges. Unless you begin thinking hard and really want to get out of it, you’ll find yourself living your life full of debts. So, how are you going to settle your financial obligations? You may decide either one of the two methods:
The Snowball Approach
Dave Ramsey, a famous money person, introduced the idea of the “snowball approach.” It is listing every one of your debts to various institutions in places you have an account (credit cards, car loan, housing loan, multi-purpose loan, etc.) and then paying off your smallest balance first. What you will do is to pay each of the minimum balances required by each of your account except the smallest one. And then, you aggressively pay off the smallest one and tackle the next smallest till you have paid everything.
The Avalanche Method
This strategy is likely opposite of the Snowball Approach. In here, you will actually start paying your most costly balance with the highest interest rate. This does not necessarily imply that your largest balance has the highest interest rate so you will have to check and think about which one has to be settled off first.
For instance, let us say you have three credit card balances. One is $1000 with an interest rate of 1%; another is $800 which has a 3.5% interest, and $900 with an interest rate of 1.5%. The first one you need to repay is $800 due to compound interest. Once you’ve ridden off the balance with the highest interest rate, you can now go to the next with the highest interest rate i.e. $900 till you have repaid them all.
The Best Thing to Do
So which strategy is most effective for you? Mr. Ramsey stated that it’s not necessarily about math but a matter of behavior. If you are someone who requires a lot of motivation to repay your debt, then the snowball approach is right for you. However, if you are someone who is driven to pay back your debt, then make use of the avalanche method. High interest rates compound rapidly therefore it normally takes time just before getting debt free.
Whenever you accomplished settling a debt, treat yourself so that you can be motivated to go on. Buy yourself a gift or treat yourself by having coffee with a friend. Once you get debt-free, start eliminating your credit cards and maintain the one which suits you best. Do not be enticed to have a new loan as this might lead you to a financial crisis again. Learn to say “No” to marketers who lure you to buy on credit. Teach yourself to be responsible and be reminded to remain out of debt.