Paying off debt is a difficult task, especially if you only pay the bare minimum each month. It’s common to have to speed payments in order to get free and clear. The debt avalanche approach and the debt snowball method are two unique strategies for settling outstanding bills in this manner.
Most types of consumer debt are affected by debt avalanche and debt snowball, including personal, student, and auto loans; credit card balances; and medical expenditures. (They don’t work with mortgage payments and shouldn’t be tried.) Each approach asks you to prepare a list of your debts and pay the bare minimum on all but one of them. That’s the one you put additional money into, with the goal of eradicating it first. Once it’s gone, you move on to a new loan; the extra money you put toward it could equal the minimal payment you had to make on the previous debt.
Which debt you target first differs between the two tactics. You pay additional money toward the debt with the highest interest rate in the debt avalanche approach. You pay down the smallest debt first and work your way up with the debt snowball strategy, regardless of the interest rate.
While both are effective tactics for getting out of debt, one may be simpler to keep to and have a greater impact on your finances. Let’s take a closer look at each method, weighing the benefits and drawbacks of the debt snowball and debt avalanche. Then we’ll go over some particular concerns for dealing with debt. By the time you reach the end, you should have a decent idea of which debt repayment option is ideal for you.
Pay more than the minimum payment
Examine your finances to see how much money you can set aside for debt repayment. Paying more than the minimum payment will help you save money on interest and get out of debt faster.
Assume you have a $15,000 credit card bill with a 17.5% APR and a $450 minimum payment. It will take approximately four years to pay off the balance if you merely make the minimum payments. In total, you’ll pay around $5,500 in interest.
You could repay the debt in less than three years and pay only $4,100 in total interest if you paid $550 per month, or $100 more than the minimum. Use a credit card payoff calculator to learn more.
Try the debt snowball
You can also use the debt snowball method for debt reduction if you’re paying more than the minimum payment. This debt repayment strategy requires you to pay the bare minimum on all of your bills except the lowest, which you will pay as much as you can toward. You can swiftly pay off your smallest debt by “snowballing” payments toward it, then moving on to the next smallest obligation while making minimum payments on the rest.
Assume you owe $5,000 on a credit card, $1,000 on a vehicle loan, and $10,000 on college loans. Because the auto loan has the lowest overall balance, you would use the debt snowball strategy to pay it off first.
The debt snowball strategy can help you stay on track by motivating you to focus on one obligation at a time rather than several debts. Only if you have a payday loan or a title loan should you ignore the debt snowball method as a viable alternative. These loans have substantially higher interest rates, ranging from 300 percent to 400 percent on average, and should be repaid as quickly as possible.
Refinance debt
Debt refinancing to a lower interest rate can save you hundreds of dollars in interest while also allowing you to pay off your debt faster. Mortgages, auto loans, personal loans, and student loans can all be refinanced.
A debt consolidation loan, which is a personal loan with lower interest rates than your existing loans, is one way to do this. You might want to consider transferring credit card debt to a balance transfer card if you have credit card debt. These cards provide 0% APR for a set period of time, usually between six and 18 months.
Commit windfalls to debt
Instead of storing the money in your bank account or indulging on yourself, apply it to your loans when you get a tax return or stimulus check. You have the option of devoting the full windfall to debt or splitting it 50/50 between debt and something pleasurable, such as a future vacation or a lavish supper.
Settle for less than you owe
You can also contact your creditors and arrange a debt settlement, usually for a far lower amount than you owe. While you can do it yourself, there are a number of third-party companies that offer debt settlement services for a cost.
While paying less than you owe and getting out of old obligations may seem like a good idea, the Federal Trade Commission warns of potential dangers. For instance, some debt settlement agencies require you to cease paying your obligations while you negotiate better terms, which might harm your credit score.
How do you save and reduce debt?
- Reduced rates or settlements can be negotiated. Make contact with your creditors and lenders to explore whether the conditions of your loans can be improved. You may be able to cut your interest rates or, in some cases, even reach a settlement for less than the full amount owed by being proactive.
- Stop taking out loans. This means you should avoid using credit cards, cash advances, or home equity lines until absolutely necessary. If at all feasible, pay in cash. This forces you to consider the following questions: “Do I truly need this?” says the narrator.
- To assist you work out a payment plan for your debts, seek consumer credit counseling. These are usually non-profit groups that rely on donations from creditors to stay afloat. You set up a monthly payment to the consumer credit counseling service, and the agency makes payments to each of your creditors on your behalf.
- The debt will snowball. You focus on paying as much as you can on one loan while making minimum payments on the rest of your bills with this technique of debt repayment. Once one loan is paid off, you choose another to focus on while continuing to pay the minimum sums on the others.
- Use a low-interest loan to consolidate high-interest debt. Consider a standard bank loan or a home equity line of credit (HELOC) to pay off high-interest debt if you own a home or property. If you don’t own a home or property, an unsecured personal loan can be a good option for you. Yes, you must repay the loan, but it is preferable to repay one loan with a low interest rate than to repay many debts with high interest rates.
- Examine your subscription services again. Is your gym membership still active? Do you watch Netflix on a regular basis? Is it possible to cut the cord or lower your cable subscription? What’s the status of your cell phone plan? Is it better to use Dropbox or iCloud for storage? Subscriptions have become such a commonplace aspect of life that it’s easy to overlook them. When it’s a recurring monthly payment, however, it may build up quickly over the course of a year.
- Make a budget that is reasonable. The first step in figuring out how to save more money and pay off debt is to understand where your money is going. Put as much money as you can toward an emergency fund and debt repayment (see Tip 1 above), but leave some room for pleasure “Most people will find it difficult to stick to an overly rigorous budget for an extended period of time.
- Plan ahead for upcoming future expenses, such as holidays and birthdays, in addition to setting a normal budget, so you don’t have to go into debt when they occur.
- Schedule frequent monthly meetings with your spouse or partner to review your budget and debt-reduction strategy. Discuss your progress, develop ideas for paying off debt faster, and create an action plan with concrete tasks to take over the next month at the meeting.
- Spending too much money on food is a bad idea. Instead of going out to eat, try eating more meals at home. The Bureau of Labor Statistics estimates that Americans spend about $7,700 per year on groceries and eating out. The average cost of a home-cooked supper is around $4.
- Reduce your alcohol consumption. Millennials spend around $300 each month on booze, according to a new survey.
- Plan your weekly menu using shop fliers and coupons. Put the money you save each week from discounts and coupons into a savings account or use it to pay off debts.
- Pack your lunch on a daily basis, not simply once or twice a week. Taking your lunch break to eat out soon adds up. If you have children who buy lunch at school every day, your weekly lunch expenditures can quickly add up. Having everyone pack their lunch on most days is a simple method to save money that may be used to pay down debt.
- Make your own coffee instead of going to Starbucks. Is it possible to do without the venti-frappaccino-mocha-latte concoction? You may easily save $50-100 each month if you follow tip #14 above.
- Look for free or low-cost entertainment options. Free concerts are held in local parks in many communities, and local libraries frequently organize free workshops and other events. Instead than paying full price at the theater during peak hours, go to a matinée (or rent a movie from Red Box to watch at home). If you use your imagination, you’ll be able to have a lot of fun without spending a lot of money.
- Get yourself a library card. You may borrow the same books, DVDs, and periodicals that you would normally pay hundreds of dollars for. Naturally, you’ll want to remember to return everything on time to prevent incurring late fees.
- Remove your credit card information from websites. It will be all too easy to keep charging products you don’t need if you do a lot of online shopping at particular stores and have your credit card information kept on those sites. Remove your credit card details from these websites so that you can’t shop online and rack up more debt.
- When your money rises, don’t automatically upgrade your lifestyle. When your salary rises, instead of buying a new television or arranging a vacation, use the extra cash to pay down debt.
- Increase your earnings. You can only stretch your current income so far sometimes. If this is the case, search for part-time job that is transitory or seasonal, or create a side business to supplement your income. If you use all of the extra money to pay off your debt, you’ll be debt-free far sooner than you thought.
- Consider making the switch to a one-car family. Consider getting rid of one of your family’s automobiles and walking, taking public transportation, or carpooling to work. While this may not be possible for everyone, if you can get by with just one vehicle for a while, you’ll save thousands of dollars a year, which will help you pay off your debts much faster.
- File for bankruptcy as a last resort. Only use this option if you’re in a dire position, as it can stay on your credit report for up to ten years and is a public record that anyone can access. You’ll also have to appear in Federal Court for one or more sessions, and the Court may order that your estate be managed and overseen by a court-appointed trustee.
If you have any further debt-reduction or money-saving suggestions, please leave them in the comments area below!
Does the snowball method work?
Using only raw data, the debt snowball method takes longer and costs more than alternative debt relief solutions such as a debt consolidation loan or a debt management program.
You can make the numbers tell the tale that the debt snowball method works just as well as a loan or debt management program if you put the appropriate numbers in the proper categories for the right amount of time and let momentum do its thing.
The truth about the debt snowball approach is that it’s a motivational program that can help you get out of debt, but it’ll cost you more money and time than other debt relief choices often a lot more money and time.
How does debt reduction work?
On the surface, debt reduction appears to be simple, but it is not, especially when a third party is involved.
Essentially, a debt reduction service promises to work with your creditors to help you clear up your debt situation (for a fee). Those promises are usually made in the form of one of two types of “debt relief”: debt settlement or debt consolidation.
Debt settlement firms use the money you pay them to negotiate with your creditors to decrease or erase the amount you owe. The trouble is that they charge a lot more than you would if you just paid off your bills yourself.
What is debt reduction in geography?
Debt accrued by certain emerging countries led to deforestation between twenty and forty years ago. To make interest payments to international banks, their leaders turned to the exploitation of natural resources.
Some organizations that owe money to developing countries are now reducing their obligations in exchange for the poorer countries’ rainforest protection.
While debt relief has slowed deforestation in certain cases, commercial exploitation of rainforests continues to be driven by private sector investment and even some state-owned banks. They invest in industries that clear enormous sections of forest, such as timber and mineral extraction.
Debt-for-nature swaps are agreements between governments that owe money and lenders in better-off countries that secure pledges to maintain rainforests.
How can we reduce national debt?
Interest rates are another means for governments to stimulate the economy, create tax revenue, and, ultimately, reduce the national debt by keeping them low. Individuals and corporations can borrow money more easily with lower interest rates. As a result, the borrowers spend their money on products and services, resulting in employment creation and tax revenue.
During times of economic crisis, the United States, the European Union, the United Kingdom, and other countries have pursued low interest rates with varying degrees of success. Having said that, maintaining interest rates at or near zero for long periods of time has not proven to be a cure for debt-ridden nations.
What is debt snowball method?
Simply explained, the “snowball approach” entails paying off the smallest of all your loans as soon as feasible. You take the money you were putting toward that payment and roll it over to the next-smallest obligation payable after that debt is settled. This practice should ideally continue until all accounts have been paid off. As you move money from the smallest balance to the next on your list, the total “snowballs” and grows greater and larger, accelerating the rate at which the debt is paid off.
The “avalanche technique,” on the other hand, prioritizes paying off the loans with the highest interest rates first. When the higher-interest loan is paid off, you apply the funds to the account with the next highest interest rate, and so on, until you’ve paid off all of your debts. In the long run, focusing on the loans with the highest interest rates will essentially mean you will pay less over time with this technique, as it handles high interest first.
The “avalanche technique” may save you money, but if the principle is substantial, the time it takes to pay off the loan with the highest interest rate might be depressing and make sticking to the plan difficult. It might be satisfying to pay off small bills rapidly. The “snowball method” may be a better fit for your debt management goals if you desire to see results quickly and work your way up.
Get organized by following these steps to apply the “snowball method” or “avalanche approach” to your financial situation:
What is the Dave Ramsey method?
The more popular “The “Avalanche Method” of debt repayment entails attacking the highest-interest credit card debt first. That makes sense. Ramsey, on the other hand, who popularized the phrase, doesn’t think so “The “Snowball Method,” which has a number of notable supporters, including a study from Northwestern University.
Make a list of your consumer bills, according to Ramsey “by balance, smallest to greatest,” and start with the lowest obligation, paying it off as much as you can while making minimum payments on the rest.
His most controversial piece of advise is to ignore interest rates unless two debts have similar payoffs, in which case the higher interest rate should be paid off first. He believes that once you’ve paid off a loan, “Add the amount you were paying on that obligation to the next one and attack it.”
“It all comes down to motivation,” he explains. “Personal finance is made up of 20% information and 80% conduct. When you start paying off the smaller obligations, you’ll notice a difference and be more driven to pay off your debt.”
“This is where I concur,” he remarked. “Paying off a single obligation is preferable to paying off numerous debts in installments.”
However, “This is where I differ,” he adds. “Interest rates are important at times. Payday loans, for example, are a particularly expensive form of borrowing. If you rely on payday loans to pay your payments on a regular basis, make sure you pay off this debt first.”
