Different Techniques For Paying Off Debt
There's some debate among financial planners as to the very best way to pay down debt
. Some say paying the highest interest rate debt first is the best way while other people insist paying the smallest balance first is the best way.
Both methods have benefits and disadvantages, so this article will take a take a look at both, and assist you to determine which technique is greatest for you.
Technique #1 - Highest Interest Rate
In this technique, you focus on paying off your highest interest rate debts first. The fundamental steps in this technique consist of:
1. Listing all of your debt by interest rate, from the highest interest rate to the lowest interest rate.
2. Commit to paying the minimum payment on each debt.
3. Determine how much additional can be applied to the highest interest rate debt.
4. Pay the minimum amount plus the extra quantity towards the debt with the highest interest rate until it's paid off.
5. When that debt is paid off, apply the amount you had been paying to the debt that's just been paid off to the next highest interest rate debt until paid off.
6. Repeat until all debts are paid in full.
This technique is the very best method mathematically, as you'll pay less interest within the long run.
Method #2 - Lowest Balance
In this method, your focus is on the debt with the lowest balance. Note: this method is frequently called the Debt Snowball method. The fundamental actions in this technique consist of:
1. List all debts in order from the smallest balance to the largest balance.
2. Commit to paying the minimum payment on each debt.
3. Determine how a lot additional could be applied to the smallest balance debt.
4. Pay the minimum amount plus the additional amount towards the debt with the smallest balance until it's paid off.
5. When that debt is paid off, apply the quantity you were paying to the debt that's paid off to the next smallest balance debt until that one is paid off.
6. Repeat until all debts are paid in full.
This technique might not be the best technique mathematically, as you'll pay more interest within the long run it takes to pay debt off. Nevertheless, this method permits you to pay smaller debts off faster, which might give you the motivation you need to stick to your debt payment plan.
So, which method is greatest for you? It depends
Method #1 is best for you if:
* You've debts with similar balances
* You have discipline to stick to your debt repayment plan
* You are a numbers individual, and you understand the benefit of paying off the highest interest rate debt first
Method #2 might be best for you if:
* Your debts don't have comparable balances - i.e., you have a $500 credit card balance, a $12,000 credit card balance, and a number of in between
* You need motivation - paying off the smallest credit card balance may be the motivation you need to stick to your debt repayment plan
* You don't mind paying much more interest over the lengthy run in exchange for obtaining rid of smaller balances initial
* You have a history of late payments -
Tip: Why not use a combination of the two methods? Utilizing a combination of both methods permits you to really feel a sense of accomplishment by paying off that initial debt (the smallest balance credit card), and gives you the motivation to start working on the next debt (the debt with the highest interest rate).
Keep in mind, the method that works for you is the method you will actually use. The most essential thing is to make a plan and stick to it so you are able to live debt free.
by: Derek Keegan
When a Good Debt Isn't Toronto Debt Settlement: An Opportunity to Set Your Financials Right Plan your tax debt settlement in a smart way Reflections on the US National Debt. Will we do what it takes to shrink it? Getting Out Of Massive Debts - How A Legitimate Debt Settlement Company Can Help A Once and Always Father - Debt Deserting (Chapter 10) The Pros And Cons Of Debt Settlement Hassle Free Debt Settlement Chocolate Diamond Jewelry - Prime Factors Before You Purchase Check-list To Purchase Rental-units Volkswagen purchases Porsche Holding Debt Problems Even Affect The Seemingly Well Off How to Purchase a Cheap Dress for a Party