DEBT: “Something, typically money, that is owed or due. It is an obligation that requires the debtor to pay money or other agreed-upon value to another party, the creditor.” We all want to gain financial freedom from debt.
Previously we discussed one option to help relieve yourself of debt. That option was by means of settlement, a legal option to pay an agreed amount of the debt and be forgiven for the remainder. Now we will focus on another option for those struggling with debt to find relief.
We’ll start with the Avalanche Method. This option, unlike settlement, is focused on you paying your balances in full without a reduced agreed amount. This is also known as debt stacking. It refers to you paying off your accounts from the highest interest rate to the lowest. For instance, when you have high interest rates, you will complete the following:
- Make all minimum payments on each account monthly
- Any extra money remaining should be paid towards the account with highest INTEREST RATE. Not the account with the highest balance.
- When the debt with the highest interest rate is paid in full, continue with this method and work on the account with the next highest interest rate. Continue this method until all your debts are paid in full.
Every account you pay off will free up more money. You won’t have to make the minimum payment on that paid account anymore. The extra money you were adding to the account now is diverted to another one. It takes time, but as this happens, your debt is getting paid off sooner. Interest in most cases is compounded daily. So as you pay your balances down in spurts, you have less interest to compound on the balance. You will therefore pay less interest overall. It’s important to note that if you have the option to make an additional payment, it should be paid to the Principal only if possible.
Like an avalanche, it may take a while before you notice the impact. But after gaining momentum, your debt will fall like a mountain of snow. An article on DaveRamsey provides examples on how you can use the avalanche method for your debt.
It does take a while to see the value of the avalanche method. If you are motivated by instant progress, then you may be disappointed. But if you’re willing to wait patiently, this method can work to your benefit.
The Snowball Method. This method addresses the cons of the Avalanche Method. This is the practice of paying off smaller debt first, and working your way up to the larger debt. For instance, if you have three credit cards with balances of $8000, $4000 and $1500 and a personal loan with a balance of $900.00, you will begin by making most of your payments on the personal loan.
You will see quick progress. The interest you will pay overall may be higher as the larger balances continue to accrue interest. However, as the smaller balances are paid in full, you can add the extra funds you’ll have to the larger balances and you’ll gradually see them decrease. This can serve as motivation if you NEED to see debt paid immediately to feel worthwhile with increased payments. You will be happy to see yourself gain financial freedom so rapidly.
As mentioned earlier, you’ll wind up paying more interest. The bigger balances won’t pause due to you paying your lower balances first. Therefore, all the interest will continue to compound with the principal balance.
Both methods of payment are good ways to find relief from debt. Each one works differently for everyone. Some of you may feel you need to keep making minimal payments on each card or loan account you have. In doing so, you’ll extend the period of time you’ll have the loans and wind up paying more in interest over time. The avalanche method is great for those looking to pay the debt off while reducing the amount of interest you pay overall. The snowball method is great for those of you looking to find motivation in paying your debt by giving you small accomplishments sooner.
There are many options available to relieve yourself of the financial burdens debt can present. We’ve already discussed a couple of scenarios here at CloudSwipe. Keep reading for more options to gain financial freedom.
Information on these options can be found on CloudSwipe exclusively.