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Finance
Finance
The Fastest Way to Pay Off Debt
There's some debate among financial planners as to the best
way to pay down debt. Some say paying the highest interest
rate debt first is the best way; others say paying the
smallest balance first is the best way.
Both methods have advantages and disadvantages, so we'll
take a look at both, and help you decide which method is
best for you.
Method #1 - Highest Interest Rate
In this method, you focus on paying off your highest
interest rate debts first. The basic steps in this method
include:
1. List all debts in order from the highest interest rate
to the lowest interest rate.
2. Commit to paying the minimum payment on every debt.
3. Determine how much extra can be applied to the highest
interest rate debt.
4. Pay the minimum amount plus the extra amount towards the
debt with the highest interest rate until it is paid off.
5. When that debt is paid off, apply the amount you were
paying to the debt that is paid off to the next highest
interest rate debt until paid off.
6. Repeat until all debts are paid in full.
This method is the best method mathematically, as you will
pay less interest in the long run.
Method #2 - Lowest Balance
In this method, your focus is on the debt with the lowest
balance. Note: this method was made popular by Dave Ramsey
and is often called the Debt Snowball method.
The basic steps in this method include:
1. List all debts in order from the smallest balance to the
largest balance.
2. Commit to paying the minimum payment on every debt.
3. Determine how much extra can be applied to the smallest
balance debt.
4. Pay the minimum amount plus the extra amount towards the
debt with the smallest balance until it is paid off.
5. When that debt is paid off, apply the amount you were
paying to the debt that is paid off to the next smallest
balance debt until paid off.
6. Repeat until all debts are paid in full.
This method may not be the best method mathematically, as
you will pay more interest in the long run. However, this
method allows you to pay smaller debts off faster, which
may give you the motivation you need to stick to your debt
payment plan.
So, which method is best for you? It depends…
Method #1 is best for you if:
* You have debts with similar balances
* You have discipline to stick to your debt repayment plan
* You are a numbers person, and you realize the benefit of
paying off the highest interest rate debt first
Method #2 may be best for you if:
* Your debts do not have similar balances - i.e., you have
a $500 credit card balance, a $12,000 credit card balance,
and several in between
* You need motivation - paying off the smallest credit card
balance may be the motivation you need to stick to your
debt repayment plan
* You don't mind paying more interest over the long run in
exchange for getting rid of smaller balances first
Tip: Why not use a combination of the two methods? Using a
combination of both methods allows you to feel a sense of
accomplishment by paying off that first debt (the smallest
balance credit card), and gives you the motivation to start
working on the next debt (the debt with the highest
interest rate).
Remember, the method that works best for you is the one you
will actually use. The most important thing is to make a
plan and stick to it so you can live debt free.
----------------------------------------------------
Kristine A. McKinley, CFP, CPA, and founder of Beacon
Financial Advisors, teaches individuals and families how to
invest and plan for retirement, college, and other
financial goals. Kristine offers financial and tax
planning on an hourly, fee-only basis.
Did you find this article helpful? If so, then be sure to
check out our new ebook, Living Debt Free!
=> http://beaconfinancialtips.com/
There's some debate among financial planners as to the best
way to pay down debt. Some say paying the highest interest
rate debt first is the best way; others say paying the
smallest balance first is the best way.
Both methods have advantages and disadvantages, so we'll
take a look at both, and help you decide which method is
best for you.
Method #1 - Highest Interest Rate
In this method, you focus on paying off your highest
interest rate debts first. The basic steps in this method
include:
1. List all debts in order from the highest interest rate
to the lowest interest rate.
2. Commit to paying the minimum payment on every debt.
3. Determine how much extra can be applied to the highest
interest rate debt.
4. Pay the minimum amount plus the extra amount towards the
debt with the highest interest rate until it is paid off.
5. When that debt is paid off, apply the amount you were
paying to the debt that is paid off to the next highest
interest rate debt until paid off.
6. Repeat until all debts are paid in full.
This method is the best method mathematically, as you will
pay less interest in the long run.
Method #2 - Lowest Balance
In this method, your focus is on the debt with the lowest
balance. Note: this method was made popular by Dave Ramsey
and is often called the Debt Snowball method.
The basic steps in this method include:
1. List all debts in order from the smallest balance to the
largest balance.
2. Commit to paying the minimum payment on every debt.
3. Determine how much extra can be applied to the smallest
balance debt.
4. Pay the minimum amount plus the extra amount towards the
debt with the smallest balance until it is paid off.
5. When that debt is paid off, apply the amount you were
paying to the debt that is paid off to the next smallest
balance debt until paid off.
6. Repeat until all debts are paid in full.
This method may not be the best method mathematically, as
you will pay more interest in the long run. However, this
method allows you to pay smaller debts off faster, which
may give you the motivation you need to stick to your debt
payment plan.
So, which method is best for you? It depends…
Method #1 is best for you if:
* You have debts with similar balances
* You have discipline to stick to your debt repayment plan
* You are a numbers person, and you realize the benefit of
paying off the highest interest rate debt first
Method #2 may be best for you if:
* Your debts do not have similar balances - i.e., you have
a $500 credit card balance, a $12,000 credit card balance,
and several in between
* You need motivation - paying off the smallest credit card
balance may be the motivation you need to stick to your
debt repayment plan
* You don't mind paying more interest over the long run in
exchange for getting rid of smaller balances first
Tip: Why not use a combination of the two methods? Using a
combination of both methods allows you to feel a sense of
accomplishment by paying off that first debt (the smallest
balance credit card), and gives you the motivation to start
working on the next debt (the debt with the highest
interest rate).
Remember, the method that works best for you is the one you
will actually use. The most important thing is to make a
plan and stick to it so you can live debt free.
----------------------------------------------------
Kristine A. McKinley, CFP, CPA, and founder of Beacon
Financial Advisors, teaches individuals and families how to
invest and plan for retirement, college, and other
financial goals. Kristine offers financial and tax
planning on an hourly, fee-only basis.
Did you find this article helpful? If so, then be sure to
check out our new ebook, Living Debt Free!
=> http://beaconfinancialtips.com/