Comparing Debt-repayment Strategies
Are you carrying debt? Have you wondered what the best way to pay it off is? I certainly have. I have watched countless episodes of “Till Debt Do Us Part,” a television show hosted by financial advisor Gail Vaz-Oxlade. I observed each one with keen interest, hoping she’d teach me a trick or two to magically erase my large debt. Unfortunately, Gail always made it clear there were no quick and easy tips or magic tricks. Getting rid of debt would require nothing less than discipline and hard work. She always advised show participants and viewers to start paying off their debt with the highest interest rate first. Dave Ramsey, another popular debt-management expert, advises a method where one pays off the debt with the lowest balance first. How do you decide which method will work best for you?
To help decide, let’s look at an example and compare the two ideas. Pretend you owe $20,000: $2,000 at 5% interest per annum, $3,000 at 15% interest per annum, $5,000 at 10% interest per annum, and $10,000 at 20% interest per annum. You have $1,000 to put to towards paying off your debt every month. After making the minimum payments to all four creditors, you would then put the remainder of the $1,000 towards the …show more content…
This lowest debt would be paid off in just over three months, and the second lowest after eight months. The momentum that builds from getting rid of one debt is called the “snowball” effect. Dave suggests that by eliminating a creditor or two quickly will motivate you to continue with your debt-repayment plan. Of the original $20,000 debt, you would have eliminated two of the four creditors and $11,439.30 would be owing after one year. After two years you would have eliminated three of the four creditors and $1,726.84 would be owing. With Dave’s method you would have paid $4,110.11 in interest over those two
Are you carrying debt? Have you wondered what the best way to pay it off is? I certainly have. I have watched countless episodes of “Till Debt Do Us Part,” a television show hosted by financial advisor Gail Vaz-Oxlade. I observed each one with keen interest, hoping she’d teach me a trick or two to magically erase my large debt. Unfortunately, Gail always made it clear there were no quick and easy tips or magic tricks. Getting rid of debt would require nothing less than discipline and hard work. She always advised show participants and viewers to start paying off their debt with the highest interest rate first. Dave Ramsey, another popular debt-management expert, advises a method where one pays off the debt with the lowest balance first. How do you decide which method will work best for you?
To help decide, let’s look at an example and compare the two ideas. Pretend you owe $20,000: $2,000 at 5% interest per annum, $3,000 at 15% interest per annum, $5,000 at 10% interest per annum, and $10,000 at 20% interest per annum. You have $1,000 to put to towards paying off your debt every month. After making the minimum payments to all four creditors, you would then put the remainder of the $1,000 towards the …show more content…
This lowest debt would be paid off in just over three months, and the second lowest after eight months. The momentum that builds from getting rid of one debt is called the “snowball” effect. Dave suggests that by eliminating a creditor or two quickly will motivate you to continue with your debt-repayment plan. Of the original $20,000 debt, you would have eliminated two of the four creditors and $11,439.30 would be owing after one year. After two years you would have eliminated three of the four creditors and $1,726.84 would be owing. With Dave’s method you would have paid $4,110.11 in interest over those two