Step 3 of 12 to Financial Wellness: Pay Down Debt

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Now that you have a solid grasp of budgeting, the next step may be tackling your debt. In this article, we will explore two effective repayment strategies: the Avalanche Method and the Snowball Method, helping you determine which approach aligns best with your financial goals.

The Avalanche Method

Also known as the Debt Stacking Method, the Avalanche Method prioritizes paying down high-interest debt first while maintaining minimum payments on lower-interest debts. 

How to implement the Avalanche Method:
  • Organize your debt by listing them in order of interest rate, from highest to lowest.
  • Make all the minimum monthly payments and put extra money towards the debt with the highest interest rate.
  • After the first debt is paid off, allocate the extra funds towards the next debt.
  • Repeat until all your debt is paid off.

The Snowball Method

In contrast, the Snowball Method emphasizes paying off the smallest debt first, regardless of interest rates. This approach allows you to focus on one debt at a time while making minimum payments on all others.

How to implement the Snowball Method:
  • Organize your debts from smallest to largest, regardless of interest rate.
  • Make all the minimum monthly payments on all your debt, but put extra money towards the smallest debt.
  • Once the smallest debt is, move on to the next one, applying the funds you were using to pay off the previous one. Continue doing this until all debt is paid off.

Pros vs. Cons

As always, there are pros and cons to each payment method, so it's always smart to think about the risks each method has before you make a decision.

The Avalanche Method:
  • Pros: Minimizes the total interest paid over time, making it a financially savvy option for those focused on budgeting.
  • Cons: It may take longer to see significant progress, which can be discouraging for some.
The Snowball Method:
  • Pros: Provides quick wins by paying off smaller debts within 18-24 months or sooner, offering motivational boosts as you tackle larger debts.
  • Cons: It may take longer to address high-interest debt, potentially leading to increased overall interest payments.

Ultimately, both debt repayment strategies have their merits and challenges. By consistently making payments, you can improve your credit score while working toward financial freedom. Choose the method that resonates with your personal motivation and financial situation, and take the first step toward a debt-free future.

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