Debt is what is accumulated when a sum of money is borrowed and not paid back. Debt can be a worrying aspect of someone’s life especially if the amount of money that is owed is a large amount and the borrower does not have sufficient means to return it. There are many schemes available online which allow you to borrow money with a simple click of the button and although they may seem like simple and easy schemes there are usually further complications that come with that borrowing.
Although borrowing money is an easy step, paying the money back can be much harder however once completed the overbearing sense of freedom and relief can be overwhelming. There are two methods that are used to pay back the debt. The Debt Avalanche Method and The Debt Snowball Method. Finding the best method for you, the one which suits your lifestyle needs, will allow you to effectively pay back the money in a timely manner.
What is the debt avalanche method?
This is the method that often results in lower payback methods over a longer period of time. Suiting someone who does not have much expendable finances or someone who receives an irregular salary. The outline of this method is to create a budget for your debt repayment and then make minimum payments on all debt and then use the remainder of your money to pay the debt with the highest interest rates. You can budget your payments for every salary you receive or if you are paid with an irregular salary then you can commit one whole salary for debt repayment. This way your money is likely to be able to be spread further across time, and you will also pay off the debt with the highest interest rate first.
Organization is the key and by organizing your debts, rearranging them in interest order can mean saving a large amount of money from interest rates as well as they can become much easier to handle and manage – not only financially but also mentally for yourself.
If you are suffering from a large amount of debt this method may be the quickest option for you, shortening the payback time by a few months. Credit cards and quick payday loans generally accumulate the most interest over time. Many of these companies also accumulate compound interest, which is the final sum of your borrowed money plus the interest on that borrowed money. So it’s basically interest upon your interest accrued by the borrowed sum. Using the debt avalanche method will eliminate the extra interest.
Let’s Consider an Example
Let us say you have three debts. One totalling $8,000 at 15% APR, one totalling $3,000 at 18% APR and another totalling $5,000 at 20% APR.
Because the 5,000 debt has a 20% APR this is counted as your biggest debt. By paying this off first you will then be able to use a larger sum to pay the 3,000 and then the 8,000 total. By paying off the 5,000 debt within the first 12 months you can save yourself around $3,000.
Although this seems like the better option. Since the payments, the debt can be deleted faster. It also adds that it could be overwhelming since your first payment or the first debt is a larger sum making you consider the snowball method – which in turn is the opposite. Paying off the smaller sum of debt first and working your way up. However, in paying off the smaller sum first you are allowing for the extra interest to build which if not paid off in an efficient time scale. This could end up building to the same amount if not more, of debt which you already owe.
Using the debt avalanche method allows you to take control of your finances. It allows you to create a plan and stick to it. It provides you with a sense of calm. Once a plan is made and set into motion you will begin to feel relief. Once you feel the relief you can begin to think about the cause/reason behind your debt to try and prevent it from happening again. Understanding where your debt comes from and how to handle it can be even more important than paying the debt itself.
Avoiding incurring any debt in the future is what you should be aiming to do once the debt you currently have has been paid back. It would be very easy to fall back into the trap of borrowing money, instead of once you see that the plan for repayment worked you can look at creating a future saving plan.
Seek for Help
If you need assistance with creating a plan for the repayments of your debt or any future payments/savings you can contact a financial advisor. Although this does usually cost – which is something you are trying to avoid. There are websites/hotlines you can call to have an outline offered to you for free but detailed plans are usually paid for. If you feel that the plan of avalanche is not working – you can combine the avalanche method with the snowball method.
Your bank may have financial advisors available to go through your plan with you and also help to set up any direct debits so that the payments are made automatically rather than you doing it individually. You may be the type of person who finds it easier to not ‘see’ the money disappear from your account, or to have to transfer it over manually. There are also special debt calculators that you can find online. By entering your different amounts and the amount you are planning to pay back and when you will be able to see how long the repayment will take, roughly.
Wanting to tackle your debt seriously is an important step to take in recovering your finances and if you have made this step, you should feel proud and the sense of relief already tickling at the seams.
Following is a nice comparison of the debt avalanche method and the debt snowball method.