If you have multiple forms of debt, as most Americans do these days, you may be looking for a way to get out of debt. Paying off debt is no easy task. It can be an emotionally draining task. One of the best ways to do this is to set up a plan, with concrete goals along the way. It’s not always easy knowing the best way to set up your plan, so that is what I would like to discuss: how to prioritize your debt free plan.
Pay off the Highest Interest First?
One of the first assumptions when it comes to setting up your plan is to think that you should pay off your loan with the highest interest. This may be the best financial decision, as it means you would pay less money in interest fees. This not only means having lower monthly payments, but it costs less to pay off your debt. Yet, when it comes to debt, it’s not always the best case.
Smallest Loan Possible – Debt Snowball
As I have discussed before, paying off debt is more than numbers. There is a lot of psychology in our decisions. We don’t go out and buy new clothes when we don’t need them (and can’t afford them) because it is the best financial decision. We commit these sort of mistakes because of other reasons. Whether it be the desire to feel good about ourselves after working at a job that we hate or trying to impress someone. We make financial decisions based on other reasons.
Because of this, paying off the highest interest isn’t the best approach. While I used to laugh at the idea, the best approach is a debt snowball. This approach means to take the smallest loan and pay it off first. This does multiple things for you. The first thing it accomplishes is to get you excited and feel like you are moving in the right direction. Most people give up on their debt free goal not because they can’t do it, but because they lose hope. It also frees up a lot of extra money each month that you would have been paying towards this small debt. This extra cash can help in a lot of ways. It can help you make more money than you need to pay out each month and it can allow you to throw MORE money towards those bigger loans. This means that the time it takes to pay off those big loans will be less.
Set a Plan Today
The best way to get out of your debt is to set up a plan. By starting with the smallest debt and seeing progress, you will be able to visualize success. There is nothing better than the feeling of being debt free. If you are looking forward to shaking off the bounds of debt, start with a plan today. If you don’t get started now, you will regret it.