Did you know that there is such a thing as “good” debt along with “bad” debt?
Today, we’re going to talk all about debt. It’s a big issue in our society, but we’re going to bring you a solution and unravel this problem.
What is “Good” Debt?
Good debt is when you borrow to buy an asset that is appreciating, like a home. It’s an investment that grows in value or can generate long-term income. Another example is taking out student loans to pay for post secondary education. Student loans and mortgages usually have a lower interest rate compared to other loans. With student loans, your education increases your value as an employee and potentially raises your future income.
What is a “Bad” Debt?
A bad debt is consumer debt like your credit card, the most common debt amongst people. Bad debt is incurred when you purchase things that don’t give you increasing or long-term value or income, carries a high interest rate, and you’re unable to pay it off right away. For example, you purchase a high-end purse on your credit card, thinking you will just pay it off “later”, but when your statement comes in you realize you can’t pay off the balance so you leave it or a portion of the amount. Eventually that purse will cost you more than the price you paid, calculating the interest you incur, and then it’ll be out of style so it’s not at all any long term investment.
What Can You Do: The Snowball Method
What we will show you in this video is a way to pay off your consumer debts. It’s called a Snowball Method. Essentially it’s a debt reduction strategy where you pay off your debt according to smallest to largest amounts. Overtime, momentum is gained as each debt paid off. Once you pay off one debt, the budget you had allotted for it gets rolled into your next debt, hence the name “Snowball Method”.
In this video, these are the steps we use:
List your different amounts of consumer debt, from smallest to largest, with a total of the sum. It can be a department credit card, bank credit card, and lines of credit.
List your different interest rates involved and the minimum that you have to pay for each debt with the total amount so you can see the overall budget.
You will want to focus on one debt at a time so that means for the first period you budget so that you can pay as much as possible on your smallest debt, and just pay the minimum for the other debts so those don’t fall behind.
Once the first debt is paid off, you take the budget you had for that and roll it over to the next smallest debt, and continue to pay the minimum for the other debts.
Repeat each step until each debt is paid in full.
Alternatively, people will split their budget into the x amount of debts they have so that they pay a little more than the minimum for each. However, in the long-term they will find that it takes them longer to pay off their debt, and what’s even more demoralizing is that it can take an average of 3.5 years to pay off a credit card.
You can try the Snowball Method or any other methods out there, but the point is to figure out a plan to pay off your debts because you simply don’t want that in your life.
Why Does the Snowball Method Work?
It’s actually more about behaviour modification than it has to do with math. If you start with the largest debt, it will follow you for a while. You may see the numbers going down, but eventually you may hit an obstacle that will prevent you from paying extra, and your other debts will still exist.
With the Snowball Method, once the smallest debt is paid off, it’s gone forever! You will see the momentum this method gives you and your other debts will eventually fall off as well. Stay committed to the plan, and you can succeed in becoming debt-free!
Ready to Conquer Debt?
Get in touch with us! Contact Taayla today to learn how to apply this method to YOUR debt and help you plan!
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