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Snowball vs Avalanche: What's the best way to pay off debt?
The avalanche debt method
In the debt avalanche method, you pay your debts from the highest interest rate to the lowest interest rate, regardless of balance.
You will pay less in interest if you pay off your debts in this order. You will also pay it off faster.
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SIMILAR ARTICLES & IDEAS:
Regular monthly bills
The bulk of your budget is made up of necessities like rent, phone and internet bills, insurance, etc. If you can lower your monthly expenses, you can save a lot for unplanned events.
- Find a cheaper place to live.
- Get a cheaper phone plan
- Find a better insurance company
- Grocery show once a week, so you don't waste food.
Debt when you're on a tight budget
There are a couple of paths you can take to pay off your high-interest debt when you're on a tight budget.
- The snowball method. For those who need to see progress, pay off the lowest balance first. You'll feel inspired to keep going.
- The avalanche method. Choose the debt with the highest interest rate to pay off first. This may require larger monthly payments and will take longer to see progress, but you will save the most money in the long run.
- If you need to prioritize your credit score, focus on paying down your credit cards first. Paying the ones you are near to maxing out will improve your score quickly by a few points.
- Set up payment plans, even if you can only afford a few dollars at a time. That way, your lenders can see you're paying something.
Incorporate unplanned entertainment in your budget
Financial professionals will advise you to cut out expensive nights out. In truth, you will have night's out, even when you're dirt poor.
To incorporate unplanned entertainment, set aside an amount each month. Be realistic. You can open another savings account for fun spending or you can use cash only.
Refinancing your home
When mortgage interest rates get low, refinancing isn't always the best choice.
Deciding when to refinance your home loan depends on several factors besides whether you can get a better mortgage rate.
Reasons to refinance your mortgage
The two big reasons to refinance are:
- To reduce your monthly mortgage payment
- To save on the overall interest you will pay on your house in the long run.
Refinancing does not always reduce the monthly payment or save on the overall interest.. A loan officer or mortgage broker can help you run scenarios that show you the cost and potential savings of refinancing.
How long you keep your home
Generally, it makes sense to refinance if you plan on staying in your home for many years.
If you plan to sell the property soon, don't refinance. Refinancing could take years to break even and begin saving you money.