You are committed to doing whatever it takes to get out of debt and remove financial worries from your life. You see a promising future, filled not with stacks of bills or collection calls, but a paid-off home and enough liquid assets to be able to enjoy life and to provide a future for your children. What a wonderful goal and one that could come true with some good choices and perseverance.
Gaining financial freedom first starts with getting out of debt, with forming your own debt reduction plan that contains solid and achievable goals. It is do it yourself debt reduction, maybe the least expensive and best way to go if you are serious about getting rid of debt.
There are two schools of thought or strategies for debt repayment: The snowball method and the avalanche method. Each has the same goals, to pay off all debt, with the exception of your home, within three years. A good plan also includes emergency savings.
The snowball method has been made famous by Dave Ramsey, one of the most famous financial gurus who turned his own debt around and counsels others to do the same. With the snowball method, you concentrate first on the smallest debt, making minimal payments to all of your other bills. Once the lowest debt is paid off, you then take the payments you might have been making on that smallest debt (if you hadn’t paid it off) and apply them to the next lowest debt until that one is paid off. It is a sort of pay it up or pay it forward approach. Paying off the smaller debts first should give you the success you need to keep going with your debt reduction plan, since you are more likely to be able to completely pay off small debts.
The avalanche approach is similar to the snowball method. Again, you apply any money that was being used on a paid off debt to the next targeted debt until everything is paid off. The difference is that instead of starting with the smallest debt, you start with the one that is costing you the most interest. The benefit of the avalanche approach is that you will save some extra money, since when you eliminate a debt you also eliminate the high interest rate, leaving you with more money to use toward the actual principle payments of your debt.
So which strategy is best for you?
Choose the snowball method if it is one that feels right to you, because the easier a repayment plan is, the more likely you are to stick with it. If you like to set weekly or monthly goals or are very task oriented, paying off your debt with the snowball method may be the right way to go.
If you have significant debt and are currently paying very high interest rates, the avalanche approach may be best for you, because the savings may be significant. If you can be patient while you wait for the debt to be paid down and can be self-motivated, paying off your debt by starting with the highest interest first may work best for you.
No matter which strategy you choose, you can’t go wrong making the commitment to get out of debt.