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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.
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 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.
The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person’s sole basis for making an investment decision. Please contact your financial professional before making an investment decision.
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Sunniva Kolostyak is data journalist for Morningstar.co.uk
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