Personal Finance Minute: 2 Easy Ways to Pay Down Debt –

Sunniva Kolostyak: Welcome to the Morningstar Personal Finance Minute. Today we’ll be looking at how to pay down debt. Most of us will take out some form of debt in our lives – student loans, mortgages, credit card. There is no right answer on how to prioritise these. Debt and money are very personal and only you can decide your relationship with them.

Debt Avalanche Method

That said, there are a few different strategies to help you. Two methods are the debt avalanche and the debt snowball. A debt avalanche looks like this. You make minimum payments on all debts. Then, any money leftover goes to paying down the debt with the highest interest rates. You then move on to the next highest until all your debt is gone.

Debt Snowball Method

Debt snowballing looks like this: You list your debt from smallest to largest, make minimum payments on all debts, and then put extra cash towards paying off the smallest debt first.

So, which is better? Theoretically, it’s always better to pay off the highest interest rate debt first, i.e., the debt avalanche method, and reduce the priciest liabilities. But debt is often about more than money, and it’s highly psychological.

Overdue small debt could trigger stressful collection calls from creditors, for example, and also paying down smaller debt first can offer a sense of control and achievement, and motivate people. So, it’s up to you to find a balance that you’re happy with.

For Morningstar, I’m Sunniva Kolostyak.

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