Debt. It can be an intimidating topic and very stressful if you have taken on more debt than you can handle. This month we discuss different ways to tackle debt and improve and strengthen your financial position.
Last month’s mailer topic was “Different Types of Loans and Keeping your Credit Score Healthy“.
One of the major considerations when you purchase a home with a home loan, is affordability. The Credit Analyst will look at a variety of factors, but in particular they will need to ensure that you can afford a loan. They take into account any existing financial commitments and this includes monthly payments towards other debt that you might have. For example, store accounts, car payments and credit cards. The amount you have left, disposable income is used to assess affordability.
Debt Avalanche vs. Debt Snowball…. What is this and what is the difference?
If you are paying of your monthly amounts every month, you are doing a great job. However, if you want to improve your current debt position and increase your affordability you might want to accelerate your monthly debt payments.
There are two well known and distinct strategies to settle outstanding balances. The debt avalanche method and the debt snowball method (Source: Investopedia).
Where to Start…
Make a list of all your debts.
List all the details, how much you owe, the interest rates and what you monthly payments are.
The Debt Avalanche Method
List your debts from highest to lowest interest rate!
Firstly you make the minimum payment on each source of debt that you have. Then, with what ever money have you available to you that month after essentials and expenses, you target the debt with the highest interest rate. You target that one account until you have completely paid it off. Next you tackle the debt with the second highest interest rate and so on.
The Debt Snowball Method
List your debts from smallest to highest balance!
Firstly you make the minimum payment on each source of debt that you have. Then, with what ever money have you available to you that month after essentials and expenses, you target the debt with smallest balance. You target that one account until you have completely paid it off. Next you tackle the debt with the second smallest balance and so on.
Which method is best?
These two strategies differ in terms of which debt you target first. They are both good strategies, it just depends which one you think you can realistically stick to?
The Debt Avalanche method, although mathematically means you pay less in interest over time, requires a lot of discipline. The first payments can potentially be quite large depending on your debt profile.
The Debt Snowball method may be more expensive over the long term as you pay more interest but it can be very satisfying and motivating to have quick successes.
First things first…
First makes some lists – have a look at the debt repayments you make each month. Then download your expenses and other payments from your banking app. Have a look where you can save money or change things around. Then decide what you want to do in terms of targeting your debt. It is not easy, but very rewarding when you get it right!