Eliminate your Debt
Debt is one of the largest financial stressor for most people, this is why paying down debt has been the top financial goal for many Canadians. Research has shown that people spend as much as 100% more on a purchases when it is used on a credit card compared to spending with their own money.
A good rule to follow is the 50 / 30 / 20 rule which allows you to take control of you spending. (click here to learn more about it). It is taking a certain percentage of your income and allocating them to your needs, wants, and goals.
There are two methods to pay off debt!
The first method is called
Snowball Method
This method of paying off your debts involves making minimum payment on all of your debts, and then putting whatever is leftover towards the debt with the smallest balance. Once that debt is paid off, continue paying that is next smallest. Repeat until you are debt free! What you are doing is allocating your different debts into different categories and taking focus on your smallest debt until that is paid off and then going on to the next. This method creates a feeling of accomplishment and you set yourself to take on a challenge to pay off your larger debt.
A good rule to follow is the 50 / 30 / 20 rule which allows you to take control of you spending. (click here to learn more about it). It is taking a certain percentage of your income and allocating them to your needs, wants, and goals.
There are two methods to pay off debt!
The first method is called
Snowball Method
This method of paying off your debts involves making minimum payment on all of your debts, and then putting whatever is leftover towards the debt with the smallest balance. Once that debt is paid off, continue paying that is next smallest. Repeat until you are debt free! What you are doing is allocating your different debts into different categories and taking focus on your smallest debt until that is paid off and then going on to the next. This method creates a feeling of accomplishment and you set yourself to take on a challenge to pay off your larger debt.
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Example: Jimmy has $2500 debt on one credit card (12%), $7500 on a second credit card (20%), and a $15,000 line of credit (10%). With the Snowball method, Jimmy would take on the $2500 credit card and $15,000 line of credit last. However it might make more economical sense to pay off the 20% credit debt first, however with the Snowball Method paying off the smaller debt first will help Jimmy with the feeling of accomplishment and motivate him to pay off all his debts.
Avalanche Method
The Avalanche Method method focuses on paying off debt with the highest interest rate. Like the Snowball Method, you still make minimum payments on all your debt, then putting whatever is leftover towards the debt with the highest interest rate. Once that is paid off you work until you reach to your lowest interest debt.
Avalanche Method
The Avalanche Method method focuses on paying off debt with the highest interest rate. Like the Snowball Method, you still make minimum payments on all your debt, then putting whatever is leftover towards the debt with the highest interest rate. Once that is paid off you work until you reach to your lowest interest debt.
Example: Jimmy has $2500 debt on one credit card (12%), $7500 on a second credit card (20%), and a $15,000 line of credit (10%). With the Avalanche Method, Jimmy would tackle down the 20% credit card first then 12% credit card, then 10% line of credit. This approach is will save him hundreds or maybe thousands, in comparison to the Snowball Method, as it is the more cost-effective approach!
So which one should you go with?
I recommend the Avalanche Method as it will save you the most money. Paying off your debt is no easy task. With the Avalanche Method, I also recommend you make a pay down on your debt as fast as possible. Making minimum payments will just end up costing you more interest and extend the time it takes you to get out of debt.
However, if you feel you need to see progress in order to eliminate your debt and stay motivate, then you can try the Snowball Method!
So which one should you go with?
I recommend the Avalanche Method as it will save you the most money. Paying off your debt is no easy task. With the Avalanche Method, I also recommend you make a pay down on your debt as fast as possible. Making minimum payments will just end up costing you more interest and extend the time it takes you to get out of debt.
However, if you feel you need to see progress in order to eliminate your debt and stay motivate, then you can try the Snowball Method!