There are two tried and tested ways to pay down your debts
Soooo you’ve got a few debts. And they've been growing and growing and growing over the holiday season. Well, guess what? You’re not alone. In fact, the average Australian currently has personal debts of $20,238, excluding a home loan.
We’re talking credit card debt, personal loans and buy now pay later accounts. But there are a few tried and tested strategies for paying down your debt faster.
Introducing the two most popular methods to chip away at a debt mountain, slowly but surely.
With the snowball method, you start by laying out all your debts in order based on the balances, from smallest to largest.
The idea is you pay off your debts based on the size of the balance, starting with the smallest.
Let’s say you have a debt of $2,000, $10,000 $4,000 and $500, you’ll start by repaying the $500 debt first.
Once you’re done with the $500 debt, you’ll roll your efforts into the $2,000 debt, which is the next smallest debt.
And so on, and so forth.
Like a snowball rolling down a hill, you’re going from small to bigger to biggest.
And no, this isn’t the most cost-effective way of repaying debts.
But for many people, the biggest challenge with paying down debt is being able to stay consistent and motivated over an extended period of time.
This method is all about providing yourself with consistent reward by closing out debt balances, and maintaining motivation levels.
For those who are looking for the most financially efficient method of repaying debt, there’s the avalanche method. With this method, you order your debts from the highest interest debt to lowest interest debt.
You then pay the minimum repayment on all your debts, and put any remaining funds towards tackling the highest interest debt first. Because high interest is bringing you down.
Once you’ve zeroed out your highest interest debt, you move onto the second highest interest debt. As you proceed, you pick up momentum and speed in your debt repayments, like an avalanche.
The idea is to hopefully save money in the long run by paying less interest on your debts. This method is best for those who don’t necessarily need consistent motivation to stay on the journey, but want to be the most efficient with their money.
As we roll into 2024, it could just be the time to start tackling your debts with a snow-related repayment strategy. Regardless of whether you choose the snowball or avalanche, it all starts with choosing a method and sticking to it.
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