Let’s face it, living with debt stinks. Often, the money left over after the bills are paid, including credit card bills or other debt, is minimal. Instead of taking a vacation to Aruba or socking away a nice chuck for a rainy day, every extra dime gets sucked down the drain in the form of debt payments. But there is a silver lining; paying down debt will eventually lead to being debt-free.
So how do you get from point A (in debt) to point B (debt-free)?
There are many debt relief strategies to choose from and due diligence is required before selecting one that will work best for your situation. However, a few tried a true methods seem to outshine the others.
The Snowball Approach
Dave Ramsey’s Snowball approach is an effective and motivating way to pay off your debt one bill at a time. The idea behind this method is to pay off the smallest debt in its entirety while making the minimum payments on all other debt. Once the smallest debt is paid in full, you move to the next smallest debt and so on, working your way through your bills from smallest to largest. The biggest benefit of this strategy: It’s motivating to see bills eliminated one at a time encouraging the bill payer to keep up the good work.
The Avalanche Approach
Similar to Ramsey’s Snowball approach, is the Avalanche approach to paying off your debt. However, the difference is the focus; pay off the highest interest debt first. For instance, if you have three credit cards you are paying off, you’d start by making larger payments to the card with the highest interest rate while still making the minimum payments to the other three cards. Once the highest interest rate card is paid in full, you move to the next highest interest rate card and so on. The benefit to this strategy: It’s very effective in minimizing the amount of interest you will pay over time.
The “I’ve Fallen into a Debt Hole and Can’t Get Out” Reality Approach
Feeling overwhelmed by the massive amount of debt you’ve accumulated, you can barely make the minimum payments, let alone try making “extra” payments on your debt (which the two previous methods require.) The reality approach requires more effort and a reality check. It’s time to sit down with all of your debt and add it up. Since you are unable to make extra payments, you are left with a few options that require more leg work: A.) Call your creditors and try lowering the interest rates so that you can pay off a little extra each month, B.) Apply for a consolidation loan at a lower interest rate, or C.) Get a second job. The benefit to this strategy: It gets the job done and the debt paid off.
Becoming debt-free is possible, but it takes work. If you’re still unsure which approach would work best for you, do your homework and create a plan.
Have you used one of these methods to become debt free? Have you encountered roadblocks to getting there?
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Whichever way to go, I think one MUST do when it comes to getting rid of debt is to set smaller, manageable goals. If you have a $10k credit card balance, you certainly want to pay it off, but setting goals along the way, say $9k then $7.5k, etc. will help keep you motivated. I think the biggest problem with getting out of debt is not creating the right plan, but sticking with it. Staying motivated with smaller goals along the way is key.
Money Beagle recently posted..Will We Make It?
Now a days, It is very easy to fall in the debt hole. Right approach given by the writer in the article regarding debt relief strategy. Really interesting ideas for solving debt problems and becoming debt free person.
Markchrs recently posted..Start forex trading
One thing with that last strategy, if you do get a consolidation loan, don’t go out and start using the “freed up” balances to make more purchases, or you’ll go backwards instead of forward!
The one thing I like with the Snowball over the Avalanche is you can start “seeing” results faster as you take the debts off the board. Especially if your highest interest rate happens to be the largest balance owed.
Thanks for the great post!
Grady Pruitt recently posted..Developing a Plan to Lose Weight Fast
Avalanche > Snowball. Makes more sense.
funancials recently posted..US Government Lays Off 30,000 & Charges $5 Fee
We started with the Snowball for the first credit card and than went into the Avalanche. We sprinted to get our credit cards paid off. Rather than taking the planned 18 months we pushed our goal to 7 months. It was so worth it!
Molly recently posted..Round-em Up- 9/30 Freaky Tomato
@Money Beagle – You have a very good point; it’s not the play, per se, but seeing the plan through! I know that in my case, I’m great at seeing a debt-repayment plan through, but not so good at seeing a savings goal through. Must…get…better!
@Markchrs – Digging yourself into debt is a lot easier than digging yourself out, that’s for sure!
@Grady – I’ve posted about consolidation loans before and I’m not a huge fan of them. I think that for most people, they don’t work. It’s only when a person gets serious and makes a debt plan for themselves they begin seeing results.
@Funancials – From a finance point of view, you’re right. The avalanche is smarter in the long run. But most people like seeing results quicker, so the snowball works for a lot of people too.
@Molly – Thanks for sharing your combined strategy! I say, do whatever works for you. Getting debt paid off faster means being able to save more for the future.
I am using both the avalanche and snowball approaches… Works for me!
Cherleen @ The College Investor recently posted..The College Investor’s Market Thoughts – September 30, 2011