Paying off your debts is a long process. It isn’t as simple as having a piece of cake. It’s a gradual process and takes lots of time. If you’re burdened with debt as well, you need to have a debt management plan.
A debt management plan will give you the direction you need to walk down this road. The best part of the story is that there are many debt plans that can help you along the way. Two of the best debt management plans include the debt avalanche and the debt snowball.
In this article today, I’m going to highlight both of them and provide you with all the details you require. Have a look:
The Debt Avalanche
Let’s start with the debt avalanche method. It works well for people who have debts with a high-interest rate. As you know, a debt with a high-interest rate is worse than anything. The interest rate doubles the debt and makes the entire process more difficult for you.
In the debt avalanche method, you make minimum payments on all your debts at once. After that, you direct the remaining amount to the debt with the highest interest rate. Hence, it’s like hitting several birds with one stone.
Merits and Demerits of the Debt Avalanche
The debt avalanche method is recommended to people mainly because it saves a considerable amount of money in the long run. It not only helps repay the debt but also improves your overall financial condition. The downside of the debt avalanche is that it takes more time than usual.
Remember that debt with a highest interest rate means a debt with the highest value. When you tackle the debt with the highest interest rate first, you ignore the others and it keeps taking more and more time.
The Debt Snowball
The second one for today is the debt snowball. It’s another effective technique for multiple debts. Yes, if you have more than two debts hanging over your head, you should consider the debt snowball method. In this method, you target the smallest debt first, the one with the lowest outstanding balance.
When done, you gradually move towards the bigger ones, the ones that are bigger in value. It has nothing to do with the interest rate. You simply move from one debt to another according to the outstanding amount.
Merits and Demerits of the Debt Snowball
The debt snowball method effectively deals with multiple debts and keeps you motivated along the way. Most people lose motivation when paying off their debts. However, it’s not the case with the debt snowball method.
When you get done with one debt, even if it’s the smallest, you get instant gratification and motivation to move further. The only downside of this method is that it leaves the issue of interest fees unaddressed. Yes, you may have to pay a little extra amount at the end of the day because of the interest fee that you neglect in this process.
That’s all, folks! Please make sure to consider all these details before you pick one. Good luck!