In this method, you focus on paying the debt first with the highest interest rate. The basic steps of this method include:

  1. List all debts in order starting with the debt with the highest interest rate towards the one with the lowest interest rate.
  2. Start paying the minimum bill (payment required per month) of all debts to avoid falling into debt with other debts debts.
  3. Determine how much more money you can pay additional to that first debt with the highest rate (it has to be a significant amount).
  4. Pay the minimum amount of that debt plus some money (the amount you determined in step 3) until you finish paying.
  5. When the debt is paid, apply that amount you paid toward the next debt with the highest interest rate.
  6. Repeat all the steps until you are free of debt.

This method is the best mathematically speaking, in the long run you will pay less interest.

Method # 2 – Pay the smallest doubt

In this method you focus on the smallest debt (not your interest rate). Note: this method was made popular by Dave Ramsey and is usually called “Debt Snowball method”.

  1. List all debts in order from the smallest to the largest.
  2. Start paying the minimum required of all debts.
  3. Determine how much additional money you can apply to that first debt on the list.
  4. Pay the minimum amount requested by the creditor and pay the additional money you determined in step 3 until you pay it in full.
  5. When the debt is fully paid, apply the amount of that debt paid to the next debt on your list until paid.
  6. Repeat all steps until you are free of debt.

This method is not the best mathematically, you will pay more interest in the long run. However, this method allows you to pay off the smallest debts first, incentivizing you and motivating you to continue in your purpose of becoming debt free.

What is the best method { It depends…

Method # 1 is better if:

 Method # 1 is better if:

  • You have debts with the same balances (same amount).
  • You have discipline to pay the financial adjustment that you are promoting (if you do not have it, you will be short of money).
  • You are a person of numbers, and you like the benefit of paying less interest.

Method # 2 may be better for you if:

 

  • Your debts do not have similar balances. Example: if you have a debt balance of $ 500 on a credit card and another debt of $ 12,000, and many similar debts with different balances.
  • You need motivation, seeing that you are paying your debts encourages you to continue.
  • You do not mind paying more interest in exchange for eliminating small debts first.

Tip : Why not use a combination of methods? Using both combined methods allows you to get a sense of accomplishment of paying off debts (the one with the smallest balance), and gives you the motivation to start working on the next one (the debt with the highest interest).

Do not forget that these methods work better if you stop borrowing until you finish paying, if you have to break the cards do it, often spending is a compulsive habit that must be broken. And remember, follow the plan to the letter in order to be free of debt. If you have to write it down and place it in a visible place, do it, because being indebted is a form of modern slavery.

Leave a Reply

Your email address will not be published. Required fields are marked *