Mary Svoboda, the Interim President& CEO at JAXFCU, recently spoke to News4Jax viewers about the effects COVID-19 may have on your credit score and how to continue making smart financial decisions. Paying off debt is not a simple task, but it will help bring financial freedom. There are two distinct methods to pay off debt: the debt avalanche method and the debt snowball method. While both are useful strategies to rid yourself of debt, there are different ways of paying it off. Remember to take your time to consider which plan makes the most sense for your needs. Here is how to find out which debt repayment method is best for you.
Should I Pay Off High-Interest Debts First?
High-interest rates can cost you more money, making the benefit of paying off high-interest rate debts first is a potential saving. If saving money over time is your primary goal, the Debt Avalanche strategy may be for you.
Debt Avalanche
This method involves making minimum payments on all your debts, then using any remaining funds to pay off the debt with the highest interest rate. Using the debt avalanche to pay off debt will save you the most money in interest payments. For individuals with larger amounts of debt, the avalanche method can also reduce the time it takes to pay off the debt by a few months.
For example, if you have $3,000 to devote to your debts each month, then the debt avalanche method will make your money go the furthest. Imagine that you have the following debts:
- $10,000 credit card debt at 18.99%
- $15,000 student loan at 4.50%
- $9,000 car loan at 3.00%
In this scenario, you pay off the credit card debt first since it has the highest interest rate, then pay off the student loan and then the car loan in 11 months, paying a total of $1,011.60 in interest vs. $1,517 in a Debt Snowball method.
Should I Pay Off Smaller Debts First?
If your goal is to pay off as many debts as possible in a faster time, starting with smaller debts might be a smart choice. However, focusing on smaller debts might mean that some of your higher interest rate debts continue. You might reach your overall goal of being debt-free sooner but may also pay more interest over time. Using the same example above, this would be the order you would pay off debt using the snowball method:
- $9,000 car loan at 3.00%
- $10,000 credit card debt at 18.99%
- $15,000 student loan at 4.50%
Debt Snowball
The advantage of the debt snowball is that it helps build motivation for debt repayment. It is not easy to get excited about debt repayment. Throwing large payments at your debt is even more challenging if you do not see quick progress, and you could be prone to throw in the towel.
With the debt snowball method, you see instant progress and will be able to pay off the debt entirely in only a few months. The debt avalanche will not work as effectively if you lose motivation and skip a month or two strategic repayments.
If you are serious about tackling your debt, pick which method is best for your situation and personality. The best approach is the one you can stick to. If you are a person that needs more motivation to pay off debt, then stick with the debt snowball method.
Both debt repayment plans are useful and can help you gain financial freedom. Use specialized debt repayment calculators to discover when you will pay off your debt and how much interest you will pay.
Check out this easy-to-use payment calculator to see what best fits your lifestyle:
https://www.magnifymoney.com/calculator/snowball-avalanche-calculator/