This Moneysense article caught my eye about a snowball debt repayment. I had always thought the best way to repay debt is to tackle the debts with the highest interest rate and total payment (eg credit card with 21% interest paid down faster than student loan with 7%). Gail Vaz-Oxlade makes it a bit more precise, she promotes paying the debt with the highest interest rate down as fast as you can, while maintaining the minimum on your remaining debt. Once your most expensive debt is gone, snowball the old payment into the payment on your next most-expensive debt. Carry on until you’re debt free, and ultimately stay that way!
I had always thought Gail’s way is the only best way, but financial Dave Ramsey, proposes a slightly different version.
With his way, you start by listing your debts smallest to largest by amount owed. You don’t worry about interest rates, it doesn’t matter if one debt has a 2% rate and another one has a 22% rate. Then you pay minimum payments on all of the debts except the smallest one then attack the smallest debt with a vengeance. Once it’s gone, take the money you were putting toward that debt, plus any extra money you find, and attack the next debt on the list. Once it’s gone, take that combined payment and go to the next debt. You knock them out one by one.
Mathematically, you pay less interest with Gail’s method because you are tackling the debts with higher interest, but Dave’s method may be extra motivational for those who need to tackle debt psychologically. Dave’s method is geared towards behavior modification. If you start paying on the largest debt, you won’t see it leave for a while. You’ll see numbers going down on a page, but that’s it. Pretty soon, you’ll lose steam and stop paying extra, but you’ll still have all your debts hanging around. For extra motivation, he suggests to ditch the small debt first, so you see progress and makes you feel accomplished faster – that one debt is out of your life forever. Soon the second debt will follow, then the next. It builds momentum, which may be very useful technique to those who need the extra nudge to get rid of debt. Sometimes, life is like that, it’s not HOW but whatever that works!
Whichever way you choose, the goal is to be financially independent – which being debt-free is necessary. Right now, my biggest debt is my mortgage, in pricey Vancouver, is astronomical. I am visualizing more income so I can pay more back to the mortgage :) !
The above cartoon above is great for personal finance websites, blogs, Facebook, Twitter, Pinterest, Powerpoint presentations, newsletters, e-books, PDFs, and more! Click on the cartoon to purchase royalty-free.