Two Powerful Ways to Destroy Debt

Americans have a lot of debt. Whether you are an individual, a business, of the government itself debt seems to make the world go round. According to the Federal Reserve the average American household has $137,063 of debt. For many it can seem like an unstoppable financial drain and no matter how much you pay the numbers don't get any lower.

I want to discuss two very popular and well known debt repayment strategies that can help you get a handle on your debt and start building toward a debt free life. Now not all debt is bad and I will talk more about good debt vs bad debt at another time but no matter what kind of debt you have paying it off always feels good. So let's take a look at the Snowball and Avalanche strategies for paying debt. Keep in mind before you can start using these strategies you'll have to record all of your current debt and have a list handy. You will also need to be making at least the minimum payments on all debt. These strategies really have to do with the money you have left over after the minimum payments are made.

If we want to make a snowball we take a little bit of snow and roll it around. Eventually it builds and builds and we have a big snowball. This strategy works by first lining up your debt from smallest to largest and then putting your extra money toward the smallest debt. You will pay off the smallest debt quickly and you can roll that money in to the next debt. Eventually you will build momentum and you'll be knocking down your debt with the financial power of all the debt that came before. Think of this as the bottom up approach. It is a very popular method because with each debt that you pay off you can see the direct result of your hard work. Each debt is its own victory and you can visualize your path to freedom with each step.

The Avalanche. A massive force of nature that destroys anything in its path. How can we harness this energy to destroy our debt as well? This strategy works by first lining up your debt from highest interest to lowest interest and then putting your extra money to the highest interest debt. Think of this as the top down approach. This strategy will ultimately pay less interest than the Snowball but you will be looking at your list of debt for much longer since you are going after the biggest one first. It may be harder to maintain your motivation by taking little bites out of the biggest debt but in the end it works out.

These two strategies are very simple in concept and can really help you create a plan and get a handle on your debt. No matter what path you take make sure that your extra payments are being applied to principle. Most of the time extra money goes to principle but some companies might apply it to your next payment instead.