When it comes to paying off debt, there are two ways to approach it. The basic rule for paying off debt is to apply extra payments to reduce the amount that you owe and to reduce the expenses that you are incurring in interest. The more principal that you pay, the less interest that you will owe. This is the real secret of paying off debt; keeping more money in your pocket.
If you only have one bill or bit of debt, then the process is easy: simply pay as much as you can toward that debt. But, most of us have several forms of debt which may include credit card bills, medical bills, student loans, car payments and a mortgage. How do you know which debt to attack first?
Here is a break down of the two main ways to pay off debt. Decide which one is right for you.
Interest Based
When you take a look at all of your debt, which bill has the highest interest rate or amount? Calculate how much interest you are paying per month on each debt and then rank them in order from most to least.
By attacking the debt that is costing you the most in interest, you will make the most impact on the money that you can save.
Debt Snowball
Another way to pay down debt is the debt snowball, the method that we are currently using and learned from Dave Ramsey. In this method, you make a list of all of your debt, from the smallest bills to the largest. You make an effort to pay off the smallest debt first as quickly as you can and then take that money that normally would go each month for that debt and apply it to your next smallest outstanding debt. You then keep going until all of your debts are paid.
By using the debt snowball, you can see immediate results that really help keep the motivation going. Plus, it is easy to consistently budget extra payments since that money would have been earmarked in your monthly payments anyway.
Whichever method you use, paying off your debt can be a satisfying way to get your finances under control.