If debt is a leading contributor to your overall stress, you are not alone. The national mean for household credit card debt is $16,000. The average total household debt, including mortgages, is $132,500.¹ That volume of debt can be a real burden on your wallet, relationships, and ability to achieve other important goals like saving for retirement.
Millions of people attempt to juggle these goals all at once, but your method does not need to be mentally and emotionally taxing. Start small, and then continue to roll the money you were paying on that debt into the next balance. Two of the most common debt reduction strategies are the Avalanche Method and the Snowball Method.
The Avalanche Method:
- Step 1: List your debts from the highest interest rate to the lowest interest rate.
- Step 2: Make minimum payments on all your debts except the highest interest rate debt.
- Step 3: Pay as much as possible on your highest interest rate debt until it is paid off.
- Step 4: Move on to the balance with the next highest interest rate and continue the cycle until you’re debt free.
By eliminating the highest interest rate debt first you are prioritizing your debt according to its cost, and you are trying to get rid of your most expensive debt first. The higher your interest rate, the more it will cost you to carry the balance.
The Debt Snowball Method:
- Step 1: List your debts from smallest to largest.
- Step 2: Make minimum payments on all your debts except the smallest.
- Step 3: Pay as much as possible on your smallest debt.
- Step 4: Repeat until each debt is paid in full.
Ditching the small debt first and gaining momentum as each balance is paid off is rewarding and can help you stick to your debt reduction strategy.
¹Bloomberg. Do You Have More Debt Than the Average American? December 15, 2016.
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