The World of Debt
32 Strategies to Attacking Debt
Anne Lee
Having a game plan to eliminating debt will assist in the journey towards saving for the future and meeting any financial goals. Before selecting a strategy to confronting your debt load, it’s important to make a full listing of all the debt that an individual has. This would include mortgages, credit card balances, unpaid bills, and even taxes owing.
For each identified debt, note the following terms:
- Total amount owing, separated into principal balance and interest
- Minimum monthly payment
- Interest rate (APR)
There are two popular strategies to eliminating debt as fast as possible: debt snowball method and debt avalanche method. Both approaches are accelerated debt repayment plans, in which any excess funds are applied against debt repaying more than the minimum payment amount requirements.
Debt Snowball Method
- The debt snowball method will prioritize abolishing the debts with the smallest amount owing. An individual should make minimum payments on all outstanding debt, and then apply any excess funds for debt repayment to the outstanding balance that has the smallest principal balance. This method will psychologically motivate an individual to stay on the strategy course of repaying debt as one will see results faster. There will be less number of debts to deal with in a shorter period of time, as the smaller amounts owing are off the plate faster. However, the debt snowball method will cost more overall in interest payments than the debt avalanche method described next.
Debt Avalanche Method
The debt avalanche method will prioritize abolishing the debts with the highest interest rates first. An individual should make minimum payments on all outstanding debt, and then apply any excess funds for debt repayment to the outstanding balance that has the highest interest rate. This method will have the most savings on interest payments, as higher interest rate debt is eliminated first.
| Debt Snowball Method | Debt Avalanche Method |
| · Focuses on eliminating debt with smallest balances | · Focuses on eliminating debt with higher interest rates |
| · Once smallest debt paid off, move to next larger principal balance of debt | · Once highest interest rate debt paid off, move to next highest interest rate debt |
| · Psychologically better as reduces the number of debts on hand | · Mathematically better as pay less interest |
Example: Debt Snowball Method
Example: Debt Avalanche Method
Consolidation of debt
At times, it may be a good idea to apply for a loan with a lower interest rate to pay off multiple debts that are at higher interest rates. This is referred to as consolidation of debt, where an individual only needs to make one payment to a debt collector instead of paying out each and every separate lender.
Avoid taking on more debt
In any strategy towards being debt-free, it is imperative that one not take on any further debt loads. Any additional debt will influence:
- Any already current debt payments
- The budget
- The ability to save for the future
- An individual’s credit score
