When it comes to paying off debt, you can use one of two major strategies: the debt snowball or debt stacking. With a debt snowball strategy, you work on paying off your debts by paying the debt with the smallest balance first and working your way up to larger debts. Debt stacking also has you pay off debts one at a time, but instead of starting with the smallest debt, you start with the debt with the highest interest rate. Both methods have their benefits, which leaves you to determine which method is best for you.
Similarities Between Debt Snowball and Debt Stacking Plans
While debt snowball and debt stacking plans differ in approach, some of the basics are the same. With each plan, you list all of your debts. While you pay the minimum on all of your debts, you put any extra money that you have toward a specific debt. As soon as that debt is paid, you put the previous monthly payment from that paid off debt and any extra money toward the next debt on the list until it is paid off. This process continues until all debts are paid. As you pay off more debts, you free up more money to attack the remaining debts faster.
Differences Between Debt Snowball and Debt Stacking Plans
The main difference between a debt snowball and debt stacking plan is how you list your debts. With a debt snowball plan, you list your debts from smallest to largest. As you pay off smaller debts, you gain motivation to help you tackle your larger debts. With a debt stacking plan, you list your debts by interest rate, going from highest to lowest. By paying the loans with the highest interest rates first, you pay less interest as you try to get out of debt.
Pros and Cons of Debt Snowball Plans
Financial advisers such as Dave Ramsey promote the debt snowball method because it allows people to see results quickly and motivates them to continue paying off debt. However, if all of your debts are significant, it may take awhile to pay off even the smallest debt, making it difficult to keep up the momentum. In addition, if your largest debts have the highest interest rates, you will pay significantly more in interest than with a debt stacking plan.
Pros and Cons of Debt Stacking Plans
With a debt stacking plan, you benefit mathematically by saving money on interest. A debt stacking plan also helps you pay off debt sooner because as you reduce the amount of interest that you pay, you also reduce the amount of time it takes to pay off the loan. However, if your loans with the highest interest rates are larger loans, it may still take a significant amount of time to pay them off. Continuing to pay off those larger debts without seeing any results right away may prove to be difficult.
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