Experts recommend it would be better to pay off debt with high interest rates first. However, paying off your small debts first oftentimes will give you the incentive to put together a monthly budget and eventually pay off all you owe.
Here are some suggestions to help you pay off debt starting from the smallest balance, which is known as the debt snowball method.
Pay Off Debt Using the Debt Snowball Method
Make a list of the smaller debts you have and try to increase what you repay; that is, take what you can afford to put aside after you have paid all the household bills, and add it to the smallest amount due. The satisfaction of paying off a small debt will motivate you to move on to the larger debts you may have incurred.
After you have paid off the first bill on your list, start paying off the second debt utilizing the same method. For example, if you paid $50.00 minimum and added an extra $25.00 for the first debt; pay $75.00 a month for the second debt. This is Debt Snowball method that many people use to pay off high interest rate credit cards.
However, you can also use it in reverse, starting from the smallest to the largest debt. Some people have found that it has been effective for keeping up their want to pay down all debts.
Create a Budget
One of the best ways to decide how much you can put aside from each paycheck is to set up a budget by listing the essentials first, including rent, mortgage, food, utilities, and pension contributions. How much you have left will decide the amount you can safely put towards the debts.
If the amount is small, don’t worry about it. The main idea is to pay more than the minimum every month.
For example, if you had a debt of $4000 at 18% interest, it would take about 291 months to pay it off with a minimum of $100.00 paid each month. Conversely, if you added $25.00 to that amount, you can pay the debt off in just 44 months. Moreover, while the interest on the former would come to $5,615.32, the latter would only increase to $1,490.22 in interest paid.
You can see from the first example given that on a $4000 debt, the interest is more than the principal amount owed.
Save Some Money to Pay Off Debt
You can cut the times you dine out, take lunch to work, use grocery coupons and buy in bulk, buy store brands instead of name brand items, and buy clothing at consignment shops or thrift shops. If you work outside the home, try carpooling or take public transportation.
Overall, debt can drag you down and stress you out. Cut up all credits cards except one, which should only be used in extreme emergencies. Pay with cash. Remember, if you can’t afford it, you can’t buy it.