9/20/2023 0 Comments Pay it down software![]() You'll need to know your monthly expenses and how much discretionary income you have to devote to your debts. Once you pay off the credit card, you would focus on paying down the personal loan (which has the second-highest interest rate) and the car loan after that. In this scenario, you'd put all extra discretionary funds toward the credit card while only making minimum payments on the personal and car loans. The goal of this strategy is to prioritize your most expensive balances and reduce your overall interest costs. Like an avalanche, there's no stopping it once momentum starts." Repeat until you've paid off all your debt. "Once you've paid off the debt with the highest interest rate, roll that payment toward the next debt with the highest interest rate. "You make minimum payments on everything, and throw as much as you can toward the debt with the highest interest rate," Rebell says. When that debt is paid off, you move down the ladder to the debt with the next-highest rate, and so on. With the avalanche method, you pay off your debts based on the interest rate, focusing your extra funds on the highest-interest debt first. Note: A study from Texas A&M University shows that creating "small victories," as the snowball method does, can be highly motivating. Once you pay off the personal loan, you'd start focusing on your credit card and then, finally, your car loan. It will not save you on cost since you're not paying on the highest interest rate first, but it can help prompt behavior changes to keep you consistent and maintain momentum." Debt snowball pros and cons "If you need those quick wins to motivate you to make progress, the debt snowball is the way to go. "The debt snowball method is a great option for people for whom debt is a behavior problem," says Bobbi Rebell, CFP ® professional and personal finance expert at Tally, which provides a financial app that helps you organize and pay off your credit cards. Generally, the snowball method is best if you want to reduce the number of debt payments you make each month or need a little extra motivation to pay down your debts. "The snowball method, while perhaps not as mathematically effective, can have significant behavioral value in that there is a strong sense of reward to paying a debt in full and reducing the number of outstanding debts." "Personal finance involves both mathematics and behavior," Barnett says. Though this is typically a more expensive than the avalanche approach - which tackles higher-interest debt first - the snowball method offers a potential "behavioral" incentive, according to David W. "By making the minimum payment on all of your other debts and putting all your extra cash toward the smallest balance obligation first, you'll pay off entire loans or cards faster, reducing the total number of bills you have to pay each month." "The snowball method can be implemented by listing your various debts in order from the lowest total balance to the highest balance and targeting paying off one debt in-full at a time in that order," says Lauren Anastasio, Certified Financial Planner TM and director of financial advice at Stash. ![]() This is said to mimic a snowball, which gets larger and gains momentum as it rolls down a hill. Once that is paid off, you then focus on the next-smallest debt (using the funds you freed up from paying off the previous balance) and repeat the cycle until all debts are paid off. You'll make minimum payments on all your debts and direct any extra funds to that smallest debt first. The debt snowball method prioritizes your lowest-balance debt. Any extra cash will go toward your highest–interest debt (avalanche) or smallest debt (snowball). Important: Under both methods, you'll continue making minimum payments on the rest of your debts. Once that's paid off, you focus on the debt with the next-highest rate.
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