Debt Snowball or Debt Avalanche: Which method is best for debt reduction?

Debt Snowball and Debt Avalanche are two methods for paying off debt. You may be wondering what are the differences in the two methods and which one is the best option for getting out of debt. Today’s blog post will discuss both to help you gain a better understanding and to help you make the best choice for your situation.

First, let’s discuss the Debt Snowball method which was made popular by Dave Ramsey. The Debt Snowball method has you list all debts in order from the lowest balance to the highest balance and has you work to pay off the smallest balance first. You continue to make minimum payments on all debt except the smallest one. You would focus on paying as much as possible on the smallest debt to pay it off quickly. Once you pay off the smallest balance, you take the payment you were making and add it to the payment for the next smallest balance. In essence, you are still making the same amount of payments each month but you are tackling the lowest balance debts in order to minimize the number of debts you have. I personally used this method the pay off our debt several years ago and it really worked for me. I like to see accomplishments along the way so psychologically this was the best method for me to use. The debt snowball helped build my confidence in the ability to pay off debt.

The Debt Avalanche method calls for you to pay off the debt with the highest interest rate first no matter the balance of the debt. Using this method you would make minimum payments on all debt besides the highest interest rate debt. You would pay as much as possible on the highest interest rate debt until you pay it off. Then you would take that payment and apply it to the next highest interest rate debt. Eventually you will pay off all your debt using this method as you would the Debt Snowball. I tried this method but found it did not work as well for me psychologically. For some people the debt avalanche would work best because you feel you are saving money by paying the highest rate balances down first. You will have to be disciplined to continue following this method as you would the Debt Snowball.

Both methods have been used to accomplish the same goals which are to pay off debt and become debt free. You have to judge for yourself as to which method you feel is the best fit that you can follow. Debt reduction is similar to weight loss plans; one size may not fit all but there is a plan out there that will work. Work out your plan for becoming debt free and follow it!

Keep in mind that getting out of debt once does not mean you will stay out of debt just like dieting for a while does not necessarily mean you will always stay on the diet and make good choices. It is a lifestyle change to stay out of debt. Choose to make the changes necessary to get out of debt and stay out of debt.  What type of financial legacy do you want to leave behind? It’s your choice.

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Debt Free Means Financial Freedom image by Stuart Miles

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Ways to Avoid Overspending!

Spending is often psychological for most of us. We may feel that we have to keep up with what others have and if we don’t have the best and newest then people will think less of us. We have to face that fact that there will always be someone else who has more than we do. Another fact I had to face was that I am not what I buy. Whether or not I have a new house or new car does not make me the person I am. Who I am comes from within. Wouldn’t it be great if everyone would stop comparing themselves to others?  We might be happier if we could just grasp this concept.

One of the ways to avoid overspending is, of course, to create a budget and stick to it. Once you become disciplined in the proper way to budget and allocate your money, you will find that overspending is less of an obstacle than it was prior to using a budget.

The word “no” will have to become part of your vocabulary, especially if you have children. We want to give our children the best of everything, but sometimes the best thing to do is to just say no to their requests. Not only will it help us stay out of debt, it will teach them that every want is not a necessity. That would apply for us as well. I know how difficult this can be, but I have found it really benefits both of us.

If you used spending as a reward in the past, find other ways to reward yourself and others that don’t involve money. I struggled with this at first, but found more satisfying rewards are those that don’t cause me to get in debt. Take time out to enjoy spending time with others. This is a reward within itself. People will often prefer your gifts of time as opposed to your gifts of money.

Another area in which people tend to overspend is on vacations. Again, I have been guilty of this, too. Travel is one of those things that I really enjoy doing and it has been one area I have had to take control of before it wrecked our budget. Typically when we plan a vacation, we only really consider the costs of the hotel and transportation. But there are so many little costs that add up quickly and take a toll on finances. First, eating out can be quite expensive so opt for less dining out if possible. Many times hotels will offer continental breakfast so definitely take advantage of them whenever possible. Then you have to consider the extra costs of choosing activities to fill the time. Do your homework and plan activities that aren’t expensive ahead of time. If you are going to the beach, take a few board games or decks of cards for evening activities.

Don’t let your emotions control your spending. Enjoy life, but within your means, not with credit card debt because you overspend!

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

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Take charge of your spending with these simple steps!

Don’t wait until tomorrow to get a grip on your spending. Using a few simple steps can help point you in the right direction today. It isn’t always necessary to make huge strides in order to make changes. For example, you wouldn’t expect to lose 10 pounds in one week by changing your eating habits. Just one pound a week would equal 52 pounds in a year! Focus on the long haul instead of just the quick results.

Even small changes can add up to big savings in the future. Here are a few steps to get you started today.

Step 1: Cut your food costs – Take a look at how you are spending your money in the food category. Plan your meals around items that are on sale at your local grocery store or find meals that use less expensive ingredients. My local grocer often runs sales for spaghetti ingredients. It might be that you buy the pasta sauce and get the noodles for free or maybe buy a spaghetti sauce get one free. I usually stock up when these specials are offered.

If you find yourself eating out frequently, try to do a better job planning meals at home. With today’s hectic schedules, it might be difficult to eat meals at home but try to as often as possible. It is a great way to save on the cost of food. If you must eat out, try to find coupons and discounts to use that will offset the cost of the meal.

Step 2: Cut your personal care costs – Buy generic whenever possible and again watch your local grocer and discount marts for discounts and coupons. My family buys generic over the counter medication and other personal care products whenever we can find them. Shampoo, deodorant, soap and other personal care items can be purchased in generic brand so opt for these more frequently. Our local dollar stores will run “$5 off your purchase of $25 or more” coupons generally on Saturdays. We receive the coupon on the bottom of our receipts. Additionally, most stores now have websites and apps that provide coupons and discounts.

Another way to cut costs in this area is do your own manicure/pedicure and hair coloring whenever possible. This one step can save you hundreds of dollars per year.

Step 3: Make sure you really need the item you are purchasing – Just because the item is on sale or you just happen to see it in the store does not necessarily mean that you need it. Consider the cost of the item and the chance that you will actually use it. From time to time I have gone through the pantry and thrown away products whose expiration date had passed. I should have only bought the items that I could have used before they expired. We could also tie this back to meal planning; knowing what you will actually use.

Step 4: Cut entertainment costs – Instead of always going to the movies and buying all those expensive snacks, go to Red Box and rent a movie then make your own snacks at home. The cost of a movie ticket has increased considerably over the years not to mention the costs of popcorn and a soda. If you really want to go to the movie theater, choose the matinee when ticket prices are lower. Eat before you go to the theater to save on the costs of snacks. Or do like we often do and stop by the dollar store and buy the large box of candy for a dollar and carry it in your purse. An even better option might be to take a walk at the local park which would be much healthier for you.

A few changes in your spending habits could make a big difference down the road. Remember, it’s all up to you. Make the choice to change a few spending habits this week that will make a positive difference in your budget!

5 Tips for Holiday Budgeting!

I know you may be thinking that it’s too early to begin planning for Christmas shopping, but it’s not. I don’t know if you realize it but Christmas is just around the corner. How do you handle the Christmas buying season without blowing the budget? Here are a few tips to help make the process a bit easier.

Tip #1: Save early. I would suggest setting aside money each week to be used for Christmas gifts beginning this week. Create another item in the budget to cover these costs. I have used envelopes and savings accounts in the past to set aside money for these items.

Tip #2: Be a smart shopper. Do your research. Watch for sales and coupons that can be used to save on items you are going to purchase. Look for coupon codes that can be applied at checkout. Every little bit that you can save will be beneficial to your budget. Remember to ask for discounts. Some stores give military discounts, teacher discounts, senior discounts, etc. Just don’t be afraid to ask.

Tip #3: Set a limit. Set a spending limit for each person on your shopping list. I know this may be asking a lot from you, but make a wise choice and set a limit for each person. If you’re like most people, we have so much anyway that we really don’t need people to get in debt just to buy us a Christmas gift. I prefer spending the time with family and friends without the stress of everyone having to buy each other gifts. Choose to enjoy the time instead of the stuff.

Tip #4: Give time: Instead of buying each other expensive gifts, make a coupon or coupon book for gifts of “time.” One suggestion might be to give someone 1 hour of uninterrupted time going for a walk around the neighborhood or your local park. Another suggestion is to give someone in your family a “game night” in which you spend time with each other playing board games or card games. Again, this would be uninterrupted time where everyone turns off the cell phones and the iPads and puts the computers away. This one was tough for me but my family is more important than my time on the computer.

Tip #5: Consider the cost: Before making those holiday purchases, consider the long-term cost. Don’t use your credit cards to purchase Christmas gifts. It will take you much longer to pay them off than you planned. Paying cash is the best option.

Here is an example of the cost of using your credit card for these purchases. We will say that you make $1,800 in purchases and put it on your credit card at a 14.9% interest rate. If you pay $50 on your bill each month, it will take you 48 months to pay off the balance and will cost you approximately $600 in interest. If, instead, you pay $100 per month it will take you 21 months to pay it off and will cost you $300 in interest. Here is a link to a credit card payoff calculator: http://www.bankrate.com/calculators/credit-cards/credit-card-payoff-calculator.aspx?MSA=&&

Take charge of your holiday spending before it takes charge of you. Commit to paying cash for your holiday purchases!