Paying off debt is a financial goal for many of us, and with good reason. Debt can not only cripple us financially, but can cause a lot of stress in our personal lives as well. Losing sleep, lack of concentration, or even creditor calls at work are all things that I hear about almost on a daily basis. It is no wonder we want to find debt repayment methods to pay it off as soon as possible.
But sometimes looking at the numbers and the situation as a whole can be overwhelming. And that is okay! What everyone needs is a plan, something simple and straightforward to help guide them as they knock away at their debt.
Once you’ve worked on your budget, curbed your spending (i.e. stopped using your credit!) and have determined how much you can put towards your debt each month, the next step is to determine what kind of repayment plan you are going to use.
Although we hope that we have seen the last of the white stuff here in the Maritimes, we might be due for a few flakes before the warm weather finally sticks around. So, it seems fitting that the two popular debt repayment styles that we are going to explore are called the Snowball Method and the Avalanche Method.
Snowball Method
The Snowball Method is the debt repayment technique that works because it helps build up your confidence and just feels better. Why? The Snowball Method involves you paying the most you can on your smallest debt, while only paying the minimums on the rest of the debts.
Once you’ve paid that debt off, you take whatever you were putting toward that debt and put it towards the next smallest debt, while still paying the minimums on the others. And this snowballs (ha! I get it now…) as you pay more debts off, you have more to allocate towards the next, until everything is paid off.
This method is great for helping you build that confidence, and it feels better emotionally, which is a really valid reason for using it. The emotional weight of our debt can be enormous, and to quickly eliminate one more creditor off our backs- it can be motivating to keep us on track.
But this method is not without its drawbacks. Because you’d be paying off your smallest debts first, this could leave the debts with higher interest rates to accumulate longer. So, the Snowball Method would cost you more in the long run.
Avalanche Method
The Avalanche Method sounds a whole lot more aggressive, but don’t worry- it won’t cost you anymore in your monthly budget. The idea behind it is that you allocate the most you can towards the debt with the highest interest rate while paying the minimums on your other debts. Once that debt is paid, you take the money you were putting towards it and put that towards the debt with the next highest interest rate, and so on, until they’re all paid off.
This method is great for the obvious reason that it is going to cost you less money in the long run, because you are going to be paying less interest. Just make sure that you don’t get discouraged by the fact that it might take you a little longer to pay off those first debts. You have to stay motivated without the reassurance of getting a statement with a $0 balance within a few months.
Bonus: Snowflake Method
There is another technique you can use concurrently with one of the other two debt repayment methods: The Snowflake Method.
The idea behind it is to put all of those little unexpected windfalls we get: tax refunds, GST refund cheques, birthday money from your grandparents (Thanks Grandma!), every little amount that doesn’t come from your anticipated income, and put it towards your debt. Those $100, $20, and $5 extra payments that you make really add up. You could end up paying off your debt a few months earlier than you thought, and wouldn’t that feel great?
What If This Doesn’t Work?
If, after applying one or more of these debt repayment methods, you still feel overwhelmed by your debts and can’t seem to make the progress you want, it might be time to get help from someone you can trust.
Licensed Insolvency Trustees, like Allan Marshall and Associates, are trained by the federal government to help you get free of your debt and back on track. Click here or call 1 (888) 371 8900 for a free, no obligation consultation.
