3 Ways to Approach Your Debt
I wanted to chat about debt payoff methods. There are two that are widely acknowledged but I also wanted to address a lesser talked about method as well.
The first method is often referred to as “The Snowball Method”. I always think this is a weird name for it since no matter which method you pick the approach is the same. You pay off the chosen debt and then send that money to the next debt thereby creating ”the snowball”. This method should more aptly be called the “Balance Method” because it consists of you listing all your debts from least to most and starting at the bottom and working your way up.
The idea is to pay off your smaller debts first and to continue to roll that money over increasing your monthly payment to well over the minimum.
This method is good especially if you are someone who likes to check off boxes. It helps people maintain focus because as they cross off debts that are paid it gives a strong feeling of accomplishment. One main con with this method is that if you have a high balance loan that also has a high interest rate you risk paying more in interest by pushing that larger loan back while you pay off the smaller ones.
This leads me to the next method which is often referred to as the Avalanche Method. This can more or less be thought of as the Interest Method. This is where you pay off your debts in order of highest rate to lowest. The idea is that you want to pay the least amount of interest possible over time, so you would want to pay off the debt that has a double-digit interest rate before you pay off the debt that has say an 8% interest rate.
The third, less talked about, method is one that I think is equally if not more important is to pay off your debts in order of which is most emotionally taxing. Money, especially money spent can often be tied to emotions. Did you go through a rough breakup and shop your way through Bloomingdales? Were you doing really well in general and then Murphy came along and now that debt weighs you down? Whatever the cause is, if it's likely to keep you motivated then sort your debt in order of which affects you the most to the least.