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Paying Off Consumer Debt: Debt Avalanche vs. Debt Snowball

Who doesn’t love the holidays? It’s a great time to kick back, relax and enjoy some quality time with those nearest and dearest to you.

While there’s a lot to love about the holidays, something that a lot of us dread is opening our credit card statements in January. Many of us take an “out of sight, out of mind” approach. The problem is that this can lead to something I like to call “bill shock” in January, when we open our credit card statements and find out we ended up spending way more than we intended to spend on the holidays.

Starting the new year in debt isn’t fun, but if you find yourself in this situation, there’s no need to panic. Here are two tried-and-true strategies for paying off your consumer debt.

The Debt Avalanche Way

With the debt avalanche way, you start by paying off the debt that’s costing you the most – the debt that has the highest interest rate. For example, if you have two credit cards, Visa #1 with an 18% interest rate and Visa #2 with a 28% interest rate, using the debt avalanche way, you’d focus on paying off Visa #2. (Don’t forget to keep paying the minimum payment on all your other credit cards, otherwise you could hurt your credit score.)

How much money is ideal to pay towards Visa #2? Personal finance is very personal, so it depends on your own personal situation. Creating a budget is a good first step to see how much you can comfortably afford to put towards paying off your debts.

Are you motivated to pay off your debts that much sooner? Go on the offense with your finances by bringing in extra income or go on the defense by cutting expenses. For example, if you’re a good photographer, you could be a wedding photographer in your spare time. Likewise, if you’re looking to save money, instead of buying lunch every day at work, you could pack your lunch once or twice a week.

The Debt Snowball Way

The second effective way to rid yourself of your debt is the debt snowball way. The debt snowball way is slightly different than the debt avalanche way. Instead of focusing on the debt with the highest interest rate, you’d focus on paying off the debt with the smallest balance. This may be the same credit card as the one with the highest interest rate or it may not be. It really depends.

Using the same example, if Visa #1 has an outstanding balance of $1,000 and Visa #2 has an outstanding balance of $4,000, with the debt snowball way you’d pay off Visa #1 first. (You’d of course still keep making the minimum payments on Visa #2 to keep your credit in good standing.)

I know this may seem counter intuitive and from an interest savings perspective, the debt snowball way doesn’t make sense, but debt repayment isn’t just about dollars and cents. It’s about doing something that motivates you to take action. If the debt snowball way motivates you the most, more power to you.

In the end, there’s no single right way to pay off  consumer debt. I’d encourage you to choose the way that works best for you, setting yourself a goal of when you’d like to pay off your debt and putting a plan in action. By creating a plan and sticking to it, you’ll drastically improve your chances of reaching your goal of debt freedom that much sooner.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

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