Don’t be fooled by the title of this article—there is no one correct strategy to pay off debt. There are numerous financial strategies to use, and choosing the right one for you depends on individual circumstances. Read on to determine which strategy will be in your best interest and get you out of the hole of debt you’ve found yourself in.
The Two Main Strategies
There are two types of payment routes most financial planners recommend for those who have found themselves in the pit of debt, called the snowball and avalanche strategies.
The Snowball Strategy
If an individual chooses to pursue the snowball strategy, they will place their focus on paying off their debts one by one, starting with the smallest account. The first step is to lay out all indebted accounts, and order them from smallest to largest. Setting aside enough money for each individual payment, an individual will then funnel all the money they have earned to pay back debt to the smallest account first. Once that’s paid off, they will then move to the next smallest account, and so on and son on until all accounts are paid off. This can have a hugely positive psychological impact on an individual struggling with numerous debts owed. The emotional rewards can be worth it to those who have found themselves struggling with the immense pressure that accompanies their debt. An issue with the snowball strategy is its lack of attention to interest rates, and that is where the avalanche strategy comes in.
The Avalanche Strategy
Many financial planners cite the avalanche strategy as the wisest route considering its attention to the accounts that charge the highest penalty the longer the debt goes unpaid. Those looking to pay less overall in the long run benefit from this strategy. In this situation, individuals order their varied accounts in order of interest rate, ranging from largest to smallest. With this list in place, a debtor will then pay off the highest interest rate account first to save more money over time. There are drawbacks to this method, too, however. Getting rid of debt is definitely a mental game, and if your highest interest account is large, it may take you a while to pay down your debt. This can be discouraging, as it seems no headway is being made. If you’re committed to paying off what you owe, this is often the most advisable route.
When it Comes to the Government
If your debt is owed to the government, more aggressive action is definitely required and bad credit scores aren’t the only consequence of not paying what’s owed. Those who owe back taxes and ignore government warnings will find themselves in a world of hurt, with money, wages, and real estate seizure being the common consequences. The government doesn’t take well to ignored warnings, and your inability to pay or contact the IRS may find your wages garnished, your home seized, and your bank accounts depleted. Don’t let it get to this point. If you find you need back taxes help, don’t hesitate to hire the help of a professional who is well-versed in the process and can offer solutions to your debt including offer in compromise situations, payment plans, and other options that can get you out of trouble with the IRS. This will ensure you get your debt paid off to the government and find yourself in a healthy financial situation once again.
Individuals who find themselves in the grips of debt know how terrifying and disheartening this financial situation can be. While there are multiple ways to handle your debt, there’s not always a singular method; in many cases, a combination of multiple methods is in your best interest. Consider your individual circumstances and determine what route will get you back on track with your finances.