Effective Methods of Managing Debt

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Borrowing money can help us achieve personal and pricey ambitions. Weather it is to get an education, buying a new home, car, starting a business, or just to help with daily expenses, debt may be the only option available to you. While debt can help realize our goals, managing debt unwisely can cause financial problems and unwanted stress.

Today, we’re going to explain some of the popular approaches to pay off debt such as the debt snowball method, debt avalanche method and a debt consolidation strategy by using peer to peer lending.

Debt Snowball method

The debt snowball method was famously introduced by a well-respected radio talk-show host, Dave Ramsey who claims momentum – not math – is the key to eliminating debt. The Debt Snowball method iterates that you should be paying off the debt with the lowest balance first, regardless of what the interest rates are on your other balances. You should make the minimum payments on all your other balances except your smallest balance, which you should pay as much as you can to get rid off. When the smallest debt is paid in full, you roll the money you were paying on that debt into the next smallest balance.

Dave Ramsey claims that the steps to the debt snowball strategy are:

Step 1: List your debts from smallest to largest regardless of interest rate.
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.

In theory, by the time the final debts are reached, the extra amount paid toward the larger debts will grow quickly, similar to a snowball rolling downhill gathering more snow, hence the name. A phycological factor is also at play – as you complete your smaller debts, you will embrace the feeling of victory and thus, you will continue to pay off more debt to sustain that feeling until you are financially free.

A study done by the Kellogg School of Management claims that people with large balances are more likely to stick with their debt payoff plan if they focus on smaller balances first.

Debt Avalanche Method

The debt avalanche method is a more commonly known method of paying of debt. It consists of making minimum payments on all debts, then using any remaining money to pay off the debt with the highest interest rate. Mathematically, this makes the most sense, you will pay less in interest if you tackle your debts in this order. Saving money on interest means you will pay your debts off more quickly. High interest loans include, but not limited to:

  • Credit cards
  • Cash advances
  • Car loans
  • Personal loans
  • Payday loans
  • Medical bills

This route may help you save time and interest over your debt payoff journey.

Debt snowballs and debt avalanches are both useful and wiping out debt is the most important outcome. If you can pay less interest with a debt avalanche, that’s great. But if you do better with the psychological benefits that come with a debt snowball, that’s fine too. The higher interest cost might just be a price that’s worth paying to help you stay on track.

Debt Consolidation Strategy

Since both consist of tackling down debt and the finding the route to financial freedom, we also suggest looking into a debt consolidation solution, which may work better along the debt avalanche strategy and would make the most sense economically. Peer to peer lending works great for debt consolidation since it normally offers better rates than credit cards, payday loans or most financial institutions for personal loans. Simply apply for a loan online and use the funds to pay off all your other debt. This will organize all your debt to one consolidated form which you can easily keep track of. goPeer is a peer to peer lending platform that connects lenders with borrowers allowing individuals to attain financial freedom quicker. To learn more about borrowing through peer to peer, visit goPeer.ca

Find the right strategy for you and stick with it. Once you come up with a consistent routine of paying off your debt, you will achieve financial freedom sooner than you think!

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