THE MOST EFFECTIVE REPAYMENT METHOD

If we paid more attention to math, few of us would get into mountains of debt.

But the fact is, many of us don’t. And once we finally plug the numbers into a calculator and see the math in front of us, we’re forced to confront the reality that our debt has to go. Fast.

But where do we start?

The two most popular methods for tackling multiple debts are the debt snowball and debt avalanche. If you’re motivated by small wins, the debt snowball will usually be your method of choice.

However, those who are more interested in optimizing their payments and effort prefer the debt avalanche.

What Is the Debt Avalanche Method?

The debt avalanche method, sometimes referred to as the debt stacking method, organizes your debt payments by prioritizing debts with the highest interest rates first.

It’s best for people who don’t necessarily care about paying off individual loans quickly. It’s also great for people who like a mathematical approach, because paying off your highest interest debt first will save you money in interest over the long term (though the interest savings over the debt snowball is rarely a significant amount).

And while the speed at which you pay off your debts is more important than the order you pay them off in, it can give some people peace of mind to know they’re doing it the “right way” according to the math.

How to Use the Debt Avalanche Method

The concept may be easy, but the execution is hard. Here’s how you can get the avalanche moving in five simple steps.

1. List All Debts From Highest Interest Rate to Lowest

Start by listing all your debts. Order them from the highest interest rate to the lowest. You can record them on paper or in a spreadsheet, app or debt calculator.

Some debts you might list include:

  • Credit card debt
  • Student loans
  • Personal loans
  • Car loans
  • Unpaid medical bills
  • Mortgage-related debt

Be sure to leave out any debts outside of (or approaching) the statute of limitations for responsibility.

2. Determine the Minimum Payment Due on Each Debt

3. Put All Extra Toward the Highest Interest Debt

4. Once It’s Paid Off, Put Extra Toward Your Next Highest Interest Debt

5. Repeat Until All Debt Is Gone

 

 

 

SOURCE: THE PENNY HOARDER



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