Knowing how much debt you should pay off, is not an easy task. Tackling your total debt may seem like a scary task, but I’m here to offer some simple strategies that can help. The two most common approaches are the ladder approach and the snowball approach.
Ladder Approach
With the ladder approach, your focus is to pay off your highest-interest debt and work your way down to your lowest interest rate.
The key to this strategy is to make your monthly budget to make sure you can meet the minimum monthly payment on all your debt. Once you have everything budgeted, you need to budget extra money aside to put towards your highest interest debt. Once the highest interest debt is repaid, you will target the next largest interest rate debt and continue to move down.
With the ladder approach, you will get out of debt fast by going after the most expensive debt first. While this will get you out of debt faster, you may not feel accomplished because it could take some time until you pay off a debt balance since your largest debt balance tends to have the highest interest rate. Due to this, you may grow tired and feel unaccomplished since you won’t see a debt obligation reach zero for some time.
Snowball Approach
If you are someone that likes to meet small goals and want to continue to feel accomplished, then the snowball approach could be better. With the snowball approach, your focus is to pay off your lowest debt balance and work your way up to your highest balance. This strategy can help people more accomplished as you are reaching small goals you’ve set aside.
Similar to the ladder approach, the key to this strategy is to make your monthly budget to make sure you can meet the minimum monthly payment on all your debt. Once you have everything budgeted, you need to budget extra money aside to put towards your smallest debt. Once the smallest debt is repaid, you will target the next smallest debt and continue to move up.
With this approach, you still want to keep an eye on your highest balance debt and see if there are opportunities to lower the interest rate in the meantime. Additionally, you may be able to transfer credit card debt to a lower-rate credit card.
While the ladder approach may get your debt paid off faster, the snowball approach will help feel successful. Paying off debt the lowest debt and having fewer bills will help you feel more confident and reduce the stress in your daily life.
It is important to note that no matter the strategy, you have to make note of the sacrifices you are making. If you quit early, making the minimum payment will take years to pay off and all the money you were going to save won’t matter anymore.
Make sure to always track your progress through a spreadsheet or budgeting app. This will give you the psychological benefit of watching your debt shrink. Also, it never hurts to throw in a few rewards for yourself when you meet certain milestones to keep you on track.