Debt Management: How to Prioritize and Rank Your Debts
Debt can be a very efficient financial tool for many people. While it lets people purchase important assets such as houses, vehicles, and more, debt can get out of hand if it is not properly managed. When it gets to a point where you are dealing with multiple different debts and accounts, proper management is vital. Otherwise, the downside of debt can begin to greatly outweigh its benefits.
How to Pay Off Debt In the Most Efficient Way
To pay off your debts, start by listing each debt individually. What is the best way to rank and prioritize your various debts? Well, this can come down to a few different factors, including:
- Interest Rate
- Total Amount of Debt
- Necessity Level
- Due Date
- Minimum Payment
There are several other factors that can be incorporated into the prioritization of debts, but these are often at the top of the list. Take a look over the terms of your various debts and accounts so that you are informed regarding the above factors. This way, you have all the information you need to plan to pay off debt as quickly as possible.
Ranked By Interest
Interest can be the biggest burden when it comes to multiple debts. Those few different APRs can begin to pile up if you are not able to pay off your debts completely. If it is affordable or doable for you, prioritizing debts by interest rates can be one of the most beneficial tactics. Simply put, begin by paying off the debt with the highest interest rate, as this will save you money over the long run. Of course, balance still matters. If you have a small debt with a high interest rate and a large balance with a slightly lower interest rate, it may be better to target the higher balance first to reduce overall interest.
The Snowball Method
One of the best known and most popular tactics to pay off debt is called the Snowball Method. This method prioritizes payments based on the balance of each. The basic idea is to pay off the lowest balance first, then tackle the next lowest balance. In addition to tackling the debts once at a time, you also snowball the amount that you are paying for each one. For example, say you are making minimum payments on three different credit cards. Credit card #1 has a balance of $1000 and your minimum payment is $50. You begin to pay more than the minimum on this card, so you start paying $150 until it is paid off. Then, when you start to tackle credit card #2, which has a balance of $2000, you roll over the original $150 to add to the minimum of credit card #2. So, you are now paying $200 on credit card #2 until it is paid off, and so on.
The Snowflake Method
The snowflake method focuses on targeting debts when you have extra money to spend. Say you spent less on gas or groceries this month. You would funnel this extra money right toward your debts. This method is a decent option for those who may not have plenty of extra income to put toward debts rapidly. It can also be a good method for those with irregular incomes, such as commission-based or freelance jobs.
Pick the Method That Works Best for YOU
When it comes to the best way to pay off debt, there is no universal right or wrong way. It comes down to your personal finances and what works best with your particular situation. Whatever the case may be, it is important to keep up on your debts and work out a budget to begin paying them down. Only making the minimum payments just keeps you under the thumb of debt for longer.