Ways to Pay Down Your Debt Sooner: Debt Avalanche vs. Debt Snowball
I hope you enjoyed the holidays and 2019 is off to a great start for you! By now you’re probably receiving your credit card statement in the mail. If you’re like half of Canadians who live paycheque to paycheque, you’re probably dreading opening it. When you’re swiping and tapping your credit card, it’s easy to lose track of how much you’re spending. This can lead to a nasty surprise when you find out how much you actually ended up spending. If paying down your debts was one of your New Year’s Resolutions, getting further in debt sure isn’t going to help you.
Instead of giving up on your New Year’s Resolution, come up with a plan of attack. Here are two effective ways to pay down your debt sooner.
When you use the debt avalanche, you focus on paying down the debt that comes with the highest interest rate. For instance, if you have a Mastercard and a store credit card. The Mastercard has a 19% interest rate, while the store credit card has a 29% interest rate. When you use the debt avalanche, you’ll put your extra cash flow towards paying off the store credit card first, while making the minimum payment on your Mastercard (otherwise you could hurt your credit score).
How much money you put towards the store credit card depends on how much you make. If you feel like your take home pay isn’t enough, consider cutting back on some unnecessary spending until your debts are under control. For example, you could do without cable for a year and use that extra money to pay off your store credit card.
Likewise, if you’d like to earn more, you could develop a side hustle, such as renting out a spare bedroom on a short-term rental website or ride sharing, to pay off your debts even sooner. By getting creative and you’ll have your debts paid off sooner rather than later.
The second way you can pay off your debts is with the debt snowball. Unlike the debt avalanche, instead of focusing on the debt with the highest interest rate, focus on the debt with the smallest balance. Sometimes both credit cards are the same, but other times they aren’t.
In the above example, let’s say the Mastercard had a balance of $500 and the store credit card had a balance of $2,500. Even though the store credit card is costing you more in terms of interest, for some people it’s more motivating to pay off one small debt at a time. (Again, be sure to pay the minimum payment on the store credit card to keep your credit in good standing.)
These are two of the most effective ways to pay down your debt. At the end of the day, all that matters is that you get your debts paid off. By choosing the method that works best for you, you can help set yourself up for financial success for the coming year.
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Writer: Sean Cooper
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 LinkedIn, Twitter, Facebook and Instagram.
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