Over the past few months, many of us have not been able to work or our hours have been significantly reduced. And it’s easy to rely on credit cards or dip into savings accounts during these types of emergencies. Fortunately, Michigan is starting to open up and the stay at home order has been lifted, but if you have been relying on credit cards lately, it may be overwhelming when you receive that monthly statement. But you don’t have to remain in debt forever. Here are a few tips on how to approach paying off debt.
The Debt Avalanche Method
In the debt avalanche method, you pay off accounts with the highest interest rate first regardless of the balance. For example, let’s say you have a credit card with a 25% interest rate and a car payment with a 4% interest rate. You would make the minimum payment on both accounts, but when determining which account to pay off first, start with the loan with the highest interest rate. Once you’ve paid that loan completely, move on to the loan with the next highest interest rate.
The idea here is that you are keeping more money in your pocket by paying less interest over time. In turn, you will have more money to apply to other debts.
The Debt Snowball Method
As stated, the debt avalanche method makes the most financial sense because you are paying less interest in the long run. However, there is another approach that works from a motivational standpoint, the debt snowball method.
In the debt snowball method, you still make the minimum payment on all of your debts, but you focus on paying off the loan with the lowest balance regardless of the interest rate. This method can help you stay motivated because you are paying off loans in full and seeing results quicker.
Another advantage to this method is, the sooner you pay off a loan, the sooner you eliminate that extra monthly payment. Take that extra money each month and use it to pay down your next debt.
More Tips for Paying Off Debt
Set a Realistic Budget – Before you dive in head first to paying off debts, determine your income and set a realistic budget. Failing to do so can keep you from reaching your financial goals, causing you to get discouraged from paying down debt altogether. Even if you can only set a small goal of paying an extra $20 a month on a credit card, you’re still working your way to paying off debt.
Don’t Forget to Pay Yourself – When planning your budget and goals to pay off debt, don’t forget to leave room for saving money. Without a savings, you may find yourself in debt again if you have another financial emergency.
Evaluate Monthly Subscriptions – Is there a gym membership that you are paying for and not using?
Also, with all of the live streaming and other online services available at our fingertips, many of us don’t even realize what we’re paying for every month. It may seem like $10 here and there and before you know it, you’re paying for five different online services but only using one or two. So sit down with your bank statement and add up all monthly subscriptions. You may be surprised at how much money you can save each month.
Looking for more tips for saving the money you work so hard for? Check out our article below.
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