Menu #7: Conquering debt with two strategies for financial liberation

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Conquering debt with two strategies for financial liberation

If all the debt Americans have were added up, how much do you think it would be? According to the Fed's most recent quarterly Household Debt and Credit Survey, the total consumer debt stands at $17.503 trillion. That's a lot of zeros!

From student loans and car payments to those sneaky credit card bills and home mortgages, it seems like everyone's got some kind of financial weight on their shoulders. But what if we told you there's a way out of this? Imagine having your income all to yourself, to save, invest, or maybe even splurge a bit without worrying about the next bill. Let's dive into how we can make this dream a reality.

Finding your path to debt-free living

There are two popular strategies people use to pay off their debts: the debt avalanche method and the debt snowball method. Let's break these down in a way that's easy to chew.

Option 1: The debt avalanche method

If you're facing a mountain of debt, deciding to tackle the steepest part first is one approach. This is also known as the debt avalanche method. You list out all your debts by interest rate, from the highest to the lowest, and throw as much money as you can at the one with the highest interest rate. Knock out the big percentages first, and you'll save a ton in interest payments over time.

Consider a scenario where you have three types of consumer debt: a $25,000 student loan at 6% interest, a $10,000 car loan at 4% interest, and a $15,000 credit card balance at 20% interest. In this situation, it's advisable to prioritize paying off the credit card balance first due to its high 20% interest rate. Once that's cleared, attention should shift to eliminating the student loan debt with a 6% interest rate. Finally, efforts should be concentrated on paying off the car loan. By following this approach, you can potentially save the most money by tackling high-interest debt first.

Option 2: The debt snowball method

Now, for a slightly different approach: the debt snowball method. You list your debts from smallest to largest, regardless of interest rate, and start by paying off the smallest debt first. It's like knocking over dominoes; as each one falls, you feel more motivated to tackle the next. This method is great for quick wins and keeping your spirits high. Sure, you might pay a bit more in interest compared to the avalanche method, but the psychological boost of seeing debts disappear can be worth its weight in gold.

Using the same example above, prioritize paying off the $10,000 car loan first, followed by eliminating the $15,000 credit card balance, and then focusing on paying off the $25,000 student loan. Clearing smaller debts faster can boost your momentum, propelling you towards becoming debt-free sooner than anticipated.

Choosing your path and staying the course

Both methods have their perks, and the best one for you depends on what motivates you more: saving money or getting quick wins. But remember, the journey to becoming debt-free is a marathon, not a sprint. You'll see friends living it up, and the temptation to veer off course will be real. However, keeping your eyes on the prize and not accumulating new debt is key. Stick to a realistic budget, and slowly but surely, you'll find your way to financial freedom.

Embarking on a journey to eliminate debt is no small feat, but it's certainly within your reach. Whether you choose to attack your debts with the precision of the avalanche method or build momentum with the snowball approach, the most important step is starting. Every dollar you free from debt is a dollar you can use to build your future, be it saving for retirement, investing, or even treating yourself to a well-deserved vacation. The road might seem long, but with determination and discipline, you'll get there. And trust us, the view from the top of that debt-free mountain is worth every step!

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