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It’s a word that can hang heavy on our shoulders. Most of us have it, and none of us want it.

Debt.

Debt can be stressful to even think about, let alone sit down and make a plan for. But – that’s exactly what we have to do in order to begin to get rid of it.

What is debt management?

Debt management is all about striking a balance between paying off debt, paying for your everyday expenses, and still being able to set money aside for savings so you can avoid letting your debt grow.

Mostly, it’s about having a plan. So let’s talk about creating a plan!

There are plenty of ways to pay off debt, but the two methods we will talk about here are the debt snowball method and the debt avalanche method.

What is the debt snowball method?

The debt snowball method is when you take all of your debts – credit cards, auto loans, mortgage, student loans, etc. – and focus on paying off the smallest debt first, while still making minimum payments on the others. 

For example, if your auto loan has the smallest balance between all of your debts, you will focus on paying that off first by higher payments on that debt. Then, once that is paid off, you move on to your next smallest balance.

The benefit to the debt snowball method is that it is rewarding to get a debt paid off. You have a feeling of accomplishment, and it motivates you to keep it up over time.

What is the debt avalanche method?

The debt avalanche method is when you focus your efforts on the debts with the highest interest rate first, while again making at least the minimum payments on all of your other debts.  

Again, once that particular debt is paid off, you move on to the next highest interest rate.

The benefit of the debt avalanche method is that generally you will end up paying less in interest over time since you are focused on paying off the highest interest rate debt.

Regardless of whether you choose the debt avalanche, the debt snowball, a combination of the two, or any other method to pay off your debt, it’s important that you do not simply make the minimum payments on every single one of your debts. If you pay only the minimum payment on every single one of your debts, not only will it take you a much longer time to pay off those debts, but you will also pay more in interest. 

What if I can only afford to make the minimum payment on loans?

If you are only able to make the minimum payments on loans – that’s okay. Continue to make those payments as best you can to avoid late fees, interest rate hikes, and a negative impact on your credit score.

You may also want to consider talking to your banker about debt consolidation. Often if you have multiple credit cards or other unsecured loans (unsecured loans are loans that are not attached to collateral – and as a result, tend to have higher interest rates), you may be able to consolidate all of those debts into a single loan or credit card. This can simplify your payments (making only one payment rather than multiple), and can sometimes lead to a lower interest rate.

Is it better to pay off debt or save money?

The short answer is…both.

You will want to strike a balance between paying off debt and saving money. As you have learned, you want to do your best to pay more than the minimum payment on at least one of your debt categories. But it’s also important to set money aside.

If you work on aggressively paying off debt, but are not able to set any money aside for savings, when an unexpected expense comes along (you blow a tire, your furnace dies, or you have an unanticipated medical expense), you may end up having to use a credit card or other loan to pay for it, putting yourself further back into debt. 

On the other hand, if you have been setting money aside, you can use those saved funds to put toward that expense instead.

How can I get started on paying off my debts?

Whether you choose the debt avalanche, the debt snowball, or any other method to pay off your debt, first you’ll want to take stock of what all of your debts are.

You’ll want to write down all of your debts – the type of debt, the lender, the monthly minimum payment, the total balance, and the interest rate. Then – here’s the scary part – you’ll want to add them all up. You can use a spreadsheet to keep track of everything. 

Now, you’ll want to go back to the debt snowball and debt avalanche methods. You will want to choose the method that best suits your goals and lifestyle, and create your plan for repayment. Determine how much you will put toward each of your debts each month, ensuring that a) you pay more than the minimum payment on at least one of your debts, and b) you still have money available for regular monthly expenses and to put toward savings.

As stressful as it can be to begin to look at your debts, making a plan for how to tackle them – and putting that plan to work – can help you feel in control of your finances. 

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