We are living in a debt-fueld society where having mountains if debt is the new normal. In fact, as of 2020, the total consumer debt totalled $4.144 trillion. That is a huge number of people who purchase things with money that they do not have. If you find yourself in this situation, don’t worry, there are 189 million other Americans in the same boat.
Although having debt has been normalised in society, it comes with a variety of problems. These are some reasons why itis bad:
- Loss of Freedom
- More now means less later
- Compound interest works both ways
The more debt you have, you slowly give away your freedom to make decisions and change your current path in life. It is a constant weight on your shoulders that does not let you live your life freely. In the same way, owing more means that you have less available later to do the things that you truly love. And as you may know about the power of compound interest, unfortunately it works both ways. When you have debt, you essentially have compound interest working against you.
But why is having debt a possible slippery slope? Some people simply can’t control their spending. Credit card bills, instalment credit as well as car and other loan payments can eventually spiral out of control, until finally you are unable to make even the minimum payment on each type of account.
There are multiple reasons why you should pay off your debt. It results in you having more extra income, a better credit score, better mental health and reduced stress.
Here are some strategies you ca use to pay off your debt.
The Debt Snowball Method
The concept of the snowball method is that you pay off debt from the smallest one to the largest. It is done by first making the minimum payment on all of your accounts, then paying extra money towards the account in which you owe the least amount of money.
Once the smallest account is paid off, take the money you were putting toward it and channel it toward your next smallest debt instead. Continue the process until all your debts are paid. It important to not that you need to pay off the account with the smallest balance regardless of the interest rate.
This method works well because you get to celebrate small wins which will give you more motivation to pay off the rest of your credit. Another benefit of this method is that there’s the potential to improve your credit scores more quickly. Lowering your credit use on individual credit cards reduces your number of accounts with outstanding balances.
When you’re facing an overwhelming amount of debt, this method lets you see progress as quickly as possible. The only disadvantage of this method is that you may end up paying more because it does not take into consideration the interest on the account.
The Avalanche Method
The concept of this method is that you pay off the debt with the highest interest rate first. You then work your way down to the account with the lowest interest rate.
To apply this method, you make the minimum payment on all of your accounts, then pay extra money towards the account in which you have the highest interest rate.
Once the account with the highest interest rate is paid off, take the money you were putting toward it and channel it toward your next high interest debt account instead. Continue the process until all your debts are paid.
Every time you pay off an account, you’ll free up more money each month to put towards the next debt. And since you’re tackling your debts in order of interest rate, you’ll pay less overall and get out of debt faster. The disadvantage is that It’ll generally take longer to see progress than with the snowball method.
Take Home Points
Is it possible to pay off your debt? The short answer is yes. The strategies explained in this post show the it can be easy to do. Choose one that will work best for young get on the path to living a less stressful life.
Like what you’ve read? Subscribe to our blog by adding your email address to the form on the right. You’ll be the first to hear about our updates