The old-school mentality for paying off debt is a sound one: Make the maximum payment you can afford toward your largest bill or the one that accumulates the most interest. Using this method, you can lessen your overall interest expenditures and spend less money repaying debt. However, the “wrong” way of paying may be a better way to get ahead. By nailing your smaller debts first and working your way to the bigger ones, you can gain confidence and momentum. Known as snowballing, this new way of paying off debt may just work better than you imagined.
Ignore the Avalanche Method
The avalanche method of paying off debt is when you take all of your outstanding loans, put them in order of interest rates, and start by tackling the highest rate. You pay as much as you can on this high-interest rate while meeting the minimum payment requirement of the others. Adhering to this formula can help you save money, but the psychology behind the snowball method has been proven more effective.
As much as you want to save on interest payments and use common sense, remember that it’s not always a numbers game that leaves you mentally satisfied.
Avoid Penalties
Penalties for failing to pay bills and debt can be severe, but they can also act as a deterrent to spending money elsewhere instead of on your debt. If you fail to pay back debt, it can result in repossession, a poor credit score, wage garnishments, and even a bank levy on unpaid state and federal taxes. The snowball method helps you avoid these unsavory situations by giving you a clear path to becoming debt-free. If you continue to struggle with tax issues, a tax professional can shore up any unresolved problems.
Gain Some Little Victories
Snowballing your debt works in a counter intuitive way, aligning your individual debts by amount owed. Start by putting the minimum amount down toward each debt, and then use any leftover cash to pay the smallest amount. You’ll find that when you use the snowball method, the number of accounts you owe money on will get smaller more quickly.
The idea here is that you’ll gain a mental and psychological stimulus from paying off each credit card, student loan, tax bill, or other type of debt in their entirety — even if it means you end up paying more in interest. If the avalanche method isn’t working, the snowball method is the ideal path, though it favors instant gratification over mathematics.
Stay on Track
Because snowballing your debt gives you momentum and a thirst to pay it all off, you can eliminate debt. However, it’s only natural that you might fall off track during the months and years it takes to pay off your debt. You might change jobs, start a family, or get married, and each of these scenarios can take a toll on your debt repayment. Each month, reanalyze your debt to get motivated and stay focused.
Math doesn’t lie when it comes to repaying debt, but sometimes human emotion outweighs simple reasoning. If it gets rid of your debt, what difference does it make anyway?
