The internet is full of blogging heads who are eagerly promoting the newest “debt solutions.” We at Eagle One decided to examine some of these systems, and let you know what our take is:
Dave Ramsey’s Debt Snowball: This system is also known as the “baby steps.”
The Method: Save up $1,000. This is to be used as an emergency fund. Now don’t touch that fund and start paying off your debts. Attempt to pay off ALL your debt, without settling. This is to keep your credit score high and ensure you abide by your agreements.
The next step is then to order your debts from smallest to largest, and start paying off your smallest debt first. One the smallest one is paid off, you move on to the next one
The Pros: The pros of this approach compared to other debt solutions is that it often has a nice motivating quality. Seeing yourself succeed at paying off a little debt might give you the boost you need to pay off the rest of your debts.
The Cons: This approach is not mathematically sound. For one, it makes more sense to pay off the debt that has the highest interest rate first. Also, it often makes more sense to attempt to settle a debt with your creditor in today’s economic landscape then get stuck paying the entire amount. This is especially true if your debts were incurred before the housing collapse in 2008 and the ensuing recession.
The Debt Avalanche: The Debt avalanche is kind of the reverse of the debt snowball. Rather than paying the lowest debt first, you pay off the highest one first. If this is the one with the highest interest. If not, you do the highest interest debt first.
The Pros: This makes mathematical sense since it keeps your total interest as low as possible.
The Cons: Again, depending on how much debt you have incurred, you may be better off settling your debt than going after it with minimum payments. After all, if you’re reading this article and seeking debt solutions, it’s likely you just can’t pay off your debts quickly…no matter how hard you try.
The most important thing, whichever route you go. Is to take control of your financial freedom and make sure you look for yourself and your family.