Understanding Good Debt vs. Bad Debt
Not all debt is created equal. Good debt is typically an investment that can grow in value or generate long-term income, such as a mortgage or a student loan for a valuable degree. Bad debt is used to purchase depreciating assets or consumables, like high-interest credit card debt for luxury items. Prioritizing the repayment of bad debt is essential.
Popular Debt Repayment Strategies
Two of the most effective methods for paying off debt are the Avalanche and Snowball methods.
- Debt Avalanche: You focus on paying off the debt with the highest interest rate first, while making minimum payments on all others. This approach saves you the most money on interest over time.
- Debt Snowball: You focus on paying off the smallest debt first, regardless of the interest rate. This method provides psychological wins that can keep you motivated.
Steps to Take Control
Start by listing all your debts, including the total amount owed, interest rates, and minimum monthly payments. Choose a repayment strategy that aligns with your personality and financial situation. Look for opportunities to increase your income or reduce expenses to free up more money for debt repayment. Consider consolidating high-interest debts into a single, lower-interest loan if it makes sense for you.
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