Personal Finance Advice

You’ll find many different opinions from a wide variety of financial experts when it comes to paying off your debt.  If you have several different accounts to pay off then you will probably encounter dozens of ideas for how to pay it all off.  Should you consolidate the debt? Should you settle the debt? What is the best way to pay off your debt when you decide once and for all that you have had enough?

There are two main schools of thought when it comes to paying off several accounts: The Debt Ladder and The Debt Snowball.  Both methods involve prioritizing your debt and aggressively paying it down one account at a time, but they differ when the decision needs to be made as to which accounts to start with.

Debt Laddering:  This involves making minimum payments on all your accounts with the exception of the one account that has the highest interest rate.  No matter what the balance of this account, it becomes your main priority and you are supposed to aggressively pay this account down until it has a zero balance.  You then move on to the remaining accounts and aggressively pay down whichever one of these has the highest interest rate.  You keep going on until every one of your accounts is paid in full.

This method makes a lot of sense mathematically.  Since many people pay a lot more in interest charges than they realize, by attacking the account with the highest interest rate you’ll save money in the long run.

Debt Snowball:  With this method you aggressively pay down the account with the smallest balance with no regard to interest charges.  All other accounts receive the minimum payment each month while the smallest account is paid off quickly.  Once this account is paid in full, you move on to the next account with the lowest balance of the remaining debt.  You methodically eliminate accounts until you reach the account with the highest balance, and then you throw all your extra money toward this account until it’s paid off.

This method makes a lot of sense psychologically.  By first paying off accounts with small balances you get a taste of victory quicker than if you pay off debt using another method.  This is a great method for people who need to witness progress in order to stay motivated.

Which method will work best for you? Choose the method that makes the most sense in your own mind.  If you can’t shake the thought of the mathematical benefit of debt laddering then use this method, but if you know in your heart that you won’t stay motivated unless you use a debt snowball then go with that one.  Really, there is no one correct way to pay off your debt as long as you eventually reach the preferred end result: zero balances.