There is more than one way to pay down debt. Debt can be a great tool for building wealth, but can also become a weight that holds you down. To help you better understand the mechanics of various debt elimination strategies, we will briefly describe the pros and cons of two different methods:
You have probably heard of this payoff strategy since it has been popularized by personal finance books and gurus. This approach focuses on paying off the smallest debt first and then moving upward. In the long run, it will be more expensive but arguably more motivating. Sticking to this plan which celebrates quicker wins can keep you from burning out and never finishing.
Though this strategy’s name may be less recognizable, its approach is often utilized. This method pays off debt starting with the largest interest rate and then moves downward. In the long run, it will be the least expensive but arguably harder to maintain. Depending on the rates and size of debts, this strategy could save you hundreds or even thousands of dollars in interest.
To get started (or restart), follow these steps to help you save more money and become financially free:
- Organize all debts (lenders, outstanding balances, interest rates, and monthly payments)
- Budget to pay the minimum monthly payments on every loan
- With discretionary income, utilize one of the above methods to extinguish all debts
- Celebrate being debt free
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