How to Pay Down Your Debt
“The ONE aspect of our financial lives that causes the most distress”
(cue Jeopardy music)
“What is DEBT?”
Correct!
Yup, you guessed it (or maybe you’ve lived it). Debt is the number one cause of financial stress in the U.S. The “right” way to pay off that debt is a constant source of confusion. Even financial experts can’t agree on the best approach to tackle this debt trap. Fortunately, we have a tool that makes setting up a debt elimination plan a walk in the park.
PowerPay is a free tool that helps you quickly set up your debt payment plan AND shows you exactly how long it will take to be debt free. You’ll input your outstanding balance and the interest rate for each of your credit accounts and like MAGIC you’ll have a repayment plan that puts you on track to no debt.
Two strategies for paying down your debt
There are two basic approaches to debt elimination.
The “avalanche” method: paying the highest interest first. This saves you money in the long run because you’ll get out of paying more in interest. The avalanche method is usually the best method if you are trying to reduce the amount of interest you pay.
The “snowball” method: Pay off your smallest balances first, as quickly as possible. As you pay down smaller debts, you’ll have more money to put towards your bigger balances. you may want to choose the snowball method if you think getting some early wins will help motivate you.
Should I save or pay down my debt?
Many people ask, “Should I save OR pay down my debt?” We recommend a balanced approach to these two financial goals. It may make sense to reduce your saving while you pay down the debt, but don’t ELIMINATE savings. Remember, paying yourself first is the golden rule. Plus, you need emergency savings in case something unexpected happens. Even if you just save $20 each month, you will continue the savings habit you started.
To learn more about understanding your debt, check out this video.
Saundra Davis is a nationally recognized financial coach and educator. Her experience in the U.S. Navy, where she made every money mistake possible, and her 20 years serving community-based organizations led her to the reality that the best way to help people find a path out of poverty is to help them become their own financial expert.