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When the latest data shows the total U.S. consumer debt has reached $14.3 trillion, it may seem as though debt is an inevitable part of running a household.
Racking up bills in the form of student loans, credit cards, and line of credit loans is easy. What’s harder is crawling out from under these bills and living a debt-free life.
The good news is that what may be difficult isn’t impossible, provided you come prepared. You can face this challenge head-on by using one of these three snow-inspired plans. They equip you with the tools you need to knock out debt once and for all.
1. Avalanche Method
The avalanche method, which is also known as debt stacking, is a repayment plan that focuses on paying back the loan or personal line of credit with the highest interest rate first. Once you clear this debt, you’ll move down the ranks to the account with the second-highest interest rate.
To get started, you’ll have to take stock of your bills. Don’t look at their balances for now, just keep an eye on their interest rates and rank them from highest to lowest.
With this list in mind, you have your first target in sight. But you aren’t ready to take a bite out of debt yet. First, you need to sit down with your budget to make sure you can do two things:
- Make the minimum payments on all your debts. You don’t want to pay off one line of credit only to ignore other bills, recommends financial institution CreditFresh. This is a quick way of adding late fines and other penalties, so you always want to hit these minimum payments.
- Cut expenses until you can funnel more money towards your highest interest. Target discretionary spending so that you can make more than the minimum on this bill.
What’s the benefit of causing an avalanche?
Like a real-life avalanche that unfolds in the Rockies, this debt payment plan makes a big impression. This technique helps you wipe out the loan or line of credit set to cost you the most amount of money in interest. You’ll save more money in the long run by focusing on interest rather than debt size.
2. Snowball Method
The snowball method takes pointers from the avalanche, but it flips this strategy on its head. Rather than focusing on the account with the highest interest, you turn your sights onto the account with the smallest balance.
For this plan to work, you’ll have to sit down with your budget again to ensure you’ll meet all the minimum payments in every account you hold. From there, any extra cash you have to put toward debt goes to the account with the smallest balance first.
Piling payments onto a small bill is an easy target, so you’ll make short work of this first goal. Once you make it, you’ll move onto the next smallest balance. Each time you pay down a debt, you’ll roll the money you were using into the next bill’s payments, gaining debt-paying momentum as you go.
And just like a snowball in real life, it grows in size and weight the more momentum it gains. Sooner or later, you’ll flatten your last and biggest debt with ease.
What’s the benefit of using the snowball method?
While an avalanche promises to save you money in interest, a snowball produces faster results and that achievement can be worth more than any savings. Seeing a “paid in full” message on even the smallest bill is a huge motivational boost that can keep you committed to the cause.
3. Snowflake Method
This last method works best when you pair it with the previous two strategies. That’s because it doesn’t involve using your budget to find consistent savings. It relies on found or unexpected savings in your day-to-day spending.
Like the snowflake that melts on your tongue, these savings tend to be small and short-lived. You have a small window of time before they melt away.
Still don’t understand what a snowflake is? Here are some examples:
- Splitting takeout with a friend when you thought you’d pick up the bill on your own
- Birthday money sent to you in the mail
- Extra earnings from side jobs and freelance work you pick up randomly
- Money you find in your winter coat pocket when you take it out of storage
Your snowflakes may look completely different from the list. Just keep in mind, your snowflake isn’t necessarily:
- Money you’ve expressly budgeted to pay off a loan or line of credit. These are small cash windfalls that you leverage towards debt.
- Huge payments. Sometimes, a snowflake consists of the $2 you managed to save by using coupons during your trip to the grocery store.
What are the benefits of collecting snowflakes?
This method is a way of doubling-down your commitment to beat debt. It piles extra cash onto planned payments to help you pay off debt faster.
Which Method Will You Choose?
Take the time to sit down with your finances to see which method fits your needs and expectations the most. There’s no right answer when it comes to paying off debt. Avalanche, snowball, or snowflake, the important part is that you make intentional payments against your bills. With a plan in hand, you’ll be able in a better position to tackle your debt.
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This content is sponsored by Mike John.
Photo: Shutterstock