Consumer debt is an extremely contradictory part of our personal finances: it’s at once common and incredibly personal. According to numerous sources, the majority of US adults owe money in some way, shape or form—and yet what this consumer debt represents can vary drastically from person to person. To some, a debt might signify a major accomplishment or progress toward a large goal. To others, it might be a constant reminder of a time of crisis or hardship. The decisions that lead us to consumer debt can be thoughtful and deliberate, or rushed and misguided. It is perhaps these differences that make it challenging to talk openly about debt for fear of judgment.
No matter how unique one’s debt situation is, there are some universal truths to borrowing money: it’s expensive and it ‘steals’ money from your other life goals. Therefore, its repayment should be a top priority. Whether you’re comfortably chipping away at a mortgage, dreading your monthly student loan payments or recovering from a credit card purchase you really couldn’t afford.
The first step is to make a list of all your debts; credit cards, medical, student loans, auto, etc. Then you need to list out your balances, interest rates and minimum payment amounts. This information will help you organize your debts how you see fit. We’d like to share a few strategies to tackle your debt, in hopes one will work for you! The first one we will talk about is called the Debt Snowball.
The Debt Snowball
This method is GREAT for beginners. You see the most progress at first! To start off, you will need to list your debts from lowest balance to highest balance. Each month set aside as much money as you can for debt repayment, with still making the minimum payments on all your debts. To begin, start off with making the minimum payments on each debt and then the rest of your money you set aside, pay all that money towards the debt with the lowest balance. You will keep doing this each month until the debt with lowest balance is paid to ZERO. You will see that will get paid off in no time! Once you have that first debt paid off, use all that money you were using to pay towards the second debt. Repeat this cycle until all your debts are paid off. This method helps you stay motivated because you will see several debts go away and free up more money each time you get one paid off! This is recommended if you feel a bit overwhelmed with debt! It is like a snowball rolling down the mountain, it accumulates more snow the further it rolls. Similar to your debts, you will accumulate more money to roll into the next loan as it rolls through your debts.
The Debt Avalanche
This method is best if you are trying to save money along the way! This is known to be the most powerful method! To start off with this method, you will organize your debts starting with the highest interest rate to the lowest interest rate. Or most expensive debt to least expensive debt. Similar to the Debt Snowball you will need to set aside an amount of money each month for debt repayment. You will continue to make your minimum payments on all the debts but you will put all your extra money towards the debt with the highest interest rate or the most expensive debt. Once that debt is paid off, you will continue to use all your money towards the next debt and go on until you get all paid off. With this method, you won’t see as much progress at first but once you see it all start to pay down, it will happen very quickly and all of the sudden you’re debt FREE!!
The Debt Consolidation
This method is for those of us who have a hard time of keeping track of all the various payments and where they need to go. With this method, you would apply for a new larger loan at your Credit Union that would pay off ALL your debts. Consolidating them into one monthly payment with one interest rate to worry about. This is much easier to keep track of! You still need to be sure to research and shop for the lowest interest rate and the best option for you. Keep in mind the rates and the minimum payment amounts. You won’t want to do this if you only qualify for a super high rate that sets you back. Once you are approved and get all your debts consolidated, it’s best to work hard to get this paid off as quickly as possible. You will still need to set aside a specific amount of money you want to use for debt repayment each month and pay this consolidation loan. Try to pay it a little early each month so you can have peace of mind that it’s taken care of!
All of these methods are great to explore and find out which one you like best. The ultimate goal is to get your debts paid off so you can free up money for other things you enjoy doing! Maybe save for a fancy vacation or a brand new car!
If you ever have any questions or need some guidance, you are always welcome to stop in anytime to your local Credit Union and ask us to explore the different methods and discover which might be best for you and your budget!
Thanks for climbing this snowy debt mountain with me! Lets figure out how we can get down now! 🙂