Most people have more than one source of debt. From credit card balances to your mortgage to your auto loan, getting a full scope of what you owe is important. In addition to the impact to your financial health, your mental health can also suffer. The stress and worry can lead to high blood pressure, anxiety, depression, ulcers, and worse. The deeper you get into debt, the more likely it is that your health will be impacted.
A common practice to take control and manage what you owe is to plan to pay the minimum each month on each debt and put extra money towards one debt. Once you’ve paid that one off, you can then turn your attention to the next bill.
There are two popular methods to where you make that additional payment: The Snowball or The Avalanche Method.
The Snowball Method
Like a snowball rolling down a hill, The Snowball Method starts small and builds momentum. Many people favor it because it’s simple, helps them feel motivated, and shows tangible accomplishments quickly. This method focuses on the smallest debts and eliminates them quickly. Once your smallest debt is paid off, you then progress to the next smallest.
You don’t reduce the amount you’re contributing to your debt payments. Instead, you’re redirecting the total amount from the first debt to the next. Your payments don’t decrease as you go through your list, but your list becomes smaller and smaller.
The Avalanche Method
The advantage of this approach is you focus on paying off the debts with the highest interest rates so, in the long run, you save more money. Create a list of your debts from highest interest rate to the lowest. Plan to make minimum payments on all your debts, as well as an additional amount toward the first debt on your list.
Once you’ve paid off your highest-interest rate debt, move onto the second highest. Continue until your debts are all paid.
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