Introduction

Managing debt can feel overwhelming, but prioritizing your debts in a repayment budget can make the process much more manageable. By understanding how to effectively prioritize what to pay off first, you can save money on interest and regain control of your finances. Here are three practical examples of how to prioritize debts in your repayment budget.

Example 1: The Snowball Method for Credit Card Debt

In this approach, you focus on paying off your smallest debts first. This method is particularly useful for those who find motivation in achieving quick wins.

Imagine you have three credit cards with the following balances:

• Card A: $300 (minimum payment $25)
• Card B: $1,200 (minimum payment $50)
• Card C: $2,500 (minimum payment $75)

By allocating any extra funds towards Card A while making minimum payments on the other two, you could clear Card A quickly. Once Card A is paid off, you roll over that $25 payment to Card B, effectively increasing your monthly payment to $75. This process continues until all debts are paid off, creating a snowball effect.

Notes: The Snowball Method is especially effective for those who need motivation from quick wins. However, it might cost you more in interest over time compared to other methods.

Example 2: The Avalanche Method for Student Loans

The Avalanche Method focuses on paying off debts with the highest interest rates first. This is ideal for those who want to minimize the amount paid in interest over time.

Let’s say you have the following debts:

• Student Loan 1: $5,000 at 6% interest (minimum payment $100)
• Student Loan 2: $10,000 at 4% interest (minimum payment $150)
• Credit Card Debt: $2,000 at 18% interest (minimum payment $50)

In this case, you would prioritize the credit card debt first because it has the highest interest rate. You pay the minimum on the other debts while putting any extra funds toward the credit card debt. Once it’s paid off, you move on to Student Loan 1, then Student Loan 2. This strategy saves you the most money over the long run.

Notes: The Avalanche Method is great for those who are disciplined and want to save on interest. It may take longer to see paid-off debts compared to the Snowball Method.

Example 3: Balanced Approach for Mixed Debts

Sometimes, a balanced approach is necessary, especially when dealing with a variety of debts and personal financial situations.

Suppose you have:

• Auto Loan: $10,000 at 5% interest (minimum payment $200)
• Medical Debt: $3,000 at 0% interest (minimum payment $30)
• Personal Loan: $5,000 at 10% interest (minimum payment $100)

In this scenario, you might choose to pay off the medical debt first, as it has no interest, allowing you to clear it quickly. Next, you could focus on the auto loan, as it has a relatively lower interest rate, while still making payments on the personal loan. This way, you manage to reduce your overall debt load without neglecting any single payment.

Notes: A balanced approach allows flexibility and can reduce stress. It’s beneficial for those with various debt types, but be sure to adjust your strategy as your financial situation changes.