Sound a little confusing? That’s because it is. You might prioritize your credit card (because it has a high interest rate) followed by your private student loans and then your federal student loans. For instance, let’s say you have federal student loans, private student loans and a credit card. Not only that, but there’s no momentum factor. Paying debts by type means you order your debts based on each specific lender-and it can get pretty confusing. Just remember: You’ll need a lot of endurance if you have crazy big debts to get through before you can pay off the smaller balances. Once that debt is paid off, you’ll move to the one with the next-highest interest rate. You pay minimum payments on everything while attacking the debt with the highest interest rate. With the debt avalanche method, you order your debts by interest rate, with the highest interest rate first. That kind of frustration will steer you right off course. It’s like trying to eat Chinese food with toothpicks (it’s going to be a long and painful process). When we say using the debt avalanche method is slow, we mean S-L-O-W. And when you throw $2,000 at a $25,000 debt. Often, the debts with the highest interest rates also have pretty large balances attached to them. Pay off debt fast and save more money with Financial Peace University.īut here’s the thing: This debt payoff method is grueling. A lot of people believe this is the best way to attack their debt because they’re worried the interest rate is killing their pocketbooks. The debt avalanche method is where you pay off your debt with the largest interest rate first. Who knew paying off debt would feel this good? What a rush! As that snowball continues to gain speed and momentum, you’ll feel unstoppable-and you’ll do everything you can to throw as much money as possible toward those remaining debts. The beauty of the debt snowball method is the excitement and motivation you gain when you see a zero balance on those first few debts you pay off. Repeat until you’re completely debt-free! When it’s gone, roll what you were paying on that debt into the payment on your next-smallest debt until you knock it out too. Throw as much money as possible toward the smallest until it’s paid off. Pay minimum payments on everything but the smallest debt. List your debts from smallest to largest (regardless of interest rate). getting bigger and bigger as it goes.īefore you know it, you’ve got a giant payment going toward your last and largest debt-and then just like that, it’s paid off. Why is it called the debt snowball method? Because as you pay off your debts from smallest to largest, the amount of money you have to throw at each debt grows like a snowball rolling down a hill. Like we’ve said, the debt snowball method is the fastest way to pay off debt. Here are some of the most common ways to pay off debt (and more reasons why the debt snowball is our favorite): That’s why the best thing you can do is attack it with everything you’ve got. Let’s face it: No one loves being in debt. So, make sure you're all squared away with Uncle Sam before you attack the rest of your debt. Why? Because the government has the power to make your life pretty miserable until you pay up, and they can even take money straight out of your paycheck. Quick Callout: If you owe the IRS any money (aka tax debt), you need to take care of that first-even if it isn't your smallest debt. That’s why it's the fastest method out there! But more on that in a minute. You’ll build momentum and stay motivated as you collect small wins one by one. That’s exactly what happens with the debt snowball method. You need some quick wins to keep you going. When you’re chipping away at debt the size of Mount Kilimanjaro, your momentum (and your motivation) can lose steam over time. And while that’s one way to pay off debt, it’s definitely not the best (or fastest) option. That’s right-most “experts” out there say you have to start by paying on the debt with the highest interest rate first. Let’s cut straight to it: If you’ve got multiple debts, pay off the smallest debt first. Keep reading to find out the best way to pay off your debt fast. You need a plan that works-not one that’ll have you spinning your wheels. And most financial “gurus” out there would probably agree with you. You might think starting with the debt with the highest interest rate is your best plan of attack. But before you get started, you’re probably wrestling with a pretty important question: Which debt do you pay off first? Ready to pay off your debt? That’s amazing-we’re rooting for you every single step of the way.
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