Debt is an unfortunate part of many people’s lives. Whether it be from student loans, mortgages, credit cards, or something else, debt can cause many people to get into financial situations that they need to dig their way out of. Luckily, there are many strategies you can use to tackle large or small debt, and each of them have their own merits.
The Debt Snowball was a term coined by Dave Ramsey. This method works well if you have several debt accounts, such as multiple student loans. First, you rank your accounts by total amount. Then, you set aside money for each month that covers the minimum repayment for all accounts, except for the smallest one. Next, you put as much money as you can toward the smallest debt. It is also recommended under this method that you look for creative ways to pay more toward the debt, such as getting a part-time job and cutting back on monthly expenses. Once you have a line of credit completely paid off, you continue with the next smallest debt until, ultimately, all debt is paid.
Many Americans have multiple kinds of debt, which can come with different interest rates. One method of paying off your debt is to tackle the high-interest debt first. While high-interest debt does not necessarily make more interest in a month than low-interest (think $100 on a credit card versus a mortgage), it can quickly compound, leading to insurmountable debt. So, to avoid quick accumulation of debt, you could try paying off high-interest debt first.
On the other hand, larger debt can add up quickly, even at a low rate. A $100,000 loan at 5% will add roughly an extra $400 per month. Let’s say you were allowed to only pay a portion of the interest and none of the principle. In just a few short months, you would have added thousands of dollars to your repayment, which can be an added burden. Instead, you could choose to tackle accounts with the highest principle in an effort to avoid an even larger repayment.
While every person’s situation is different, sticking to a debt-repayment strategy can help keep debt under control. Whether one of these options is right for you or not, it’s a good idea to think about the ways you can improve your financial situation by paying down debt.
Ben Soccodato is a registered representative of and offer securities, investment advisory and financial planning services through MML Investors Services, LLC. Member SIPC. www.SIPC.org 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000