Choosing Which of your Debts to Pay Off First
Debt can be a true burden to your financial well-being. It can prevent you from saving money and preparing for the future, and it can make it more difficult to manage your budget each month. If you have decided to take action and eliminate debt from your life, you may be wondering which debts to focus your attention on first. Regardless of whether you have twenty dollars extra to use toward debt reduction each month or considerably more, you have a few different strategies that you can follow to generate great results.
Consider the Loan Due Date
As your loan due dates approach, you may find that you carry a very small remaining balance on a specific account. In the case of title loans and other debts, you may be required to pay the balance off in full by the due date. These debts clearly take priority as you may face significant penalties by not paying them off on time. Therefore, carefully research the due dates of any outstanding debts first. By focusing your attention on these accounts initially, you can eliminate these payments in your budget. You will then have more money available each month to focus on eliminating other debts.
Focus on Interest Rates
With some accounts, you may have very low balances or pending due dates, and these understandably require your attention first. However, you may also have several larger balances, and it may take you several long months or even years to pay these off if you only make the minimum monthly payment. There are essentially two different ways to combat these higher balances. One option is to focus on the account with the highest interest rate first. Interest is a financial drain that wastes your money. By eliminating the account with the highest interest rate, you will be saving money in the long run. Some people, however, may choose to consolidate dates. For example, you may transfer your higher interest rate balance to a credit card with a lower balance. This can make it easier for you to pay the balance off because more of your payments will be attributed to debt reduction rather than to interest.
Review the Loan Balance
The other option is to focus your attention on the account with the next lowest balance. This account will be able to be paid off more quickly than the others. This means that once the account is paid in full, you can contribute an even greater amount of money each month toward eliminating larger balances. This tactic is called the snowball effect, and it is commonly recommended by many financial experts. However, each person has a unique financial situation with variations in loan balances, terms and available funds to make payments with. Therefore, it is up to you to decide the best strategy to use.
Accomplishing a debt elimination goal can be liberating in many ways. You may enjoy greater financial security and sleep easier at night. You may also be able to improve your lifestyle and save more money for the future. As you work toward your debt elimination goal, focus on the small successes you are enjoying each month. It can take months or years to fully eliminate debt, and focusing on your progress can be motivating as you progress along your path.
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