There are two popular methods of paying off debts, and different methods work for different kinds of debts and different kinds of people. It all depends on what you’re comfortable with, and which method makes the most sense for your financial situation. The first method is the debt avalanche, where you figure out the interest rates of your debts before making any moves to pay one off. After you know your interest rates from highest to lowest, you’ll figure out the minimum payment for each debt.
In a debt avalanche, you tackle the debt with the highest interest rate first, then the debt with the next highest interest rate, and so on. As you pay off debts completely, you avalanche down the hill toward the lowest interest rates, and eventually pay everything off. The main reason people use the avalanche method is to minimize the amount of interest you’re accumulating by paying off high interest rate debts first.
Then there’s the debt snowball, which organizes your debts from smallest to largest and pays off the smallest debt first. With this method, you make larger payments toward the smallest debt to aggressively pay it off in a short period of time while simultaneously making the minimum payments toward any other debts. The reason why this method is popular is because people find it helpful to see results quickly; it motivates them to pay off even more debts once the first in the snowball is paid off.
There’s no one “right” way to pay off your debts. Take a look at your debts, your interest rates, and what you’re able to put toward monthly payments, and one method may stand out as the right one for you. Contact Cain and Daniels today to talk with us about different debt management methods.