The Fastest Way To Pay Off Debt

There’s some debate among financial planners as to the best way to pay down debt. Some say paying the highest interest rate debt first is the best way; others say paying the smallest balance first is the best way.

Both methods have advantages and disadvantages, so we’ll take a look at both, and help you decide which method is best for you.

Method #1 – Highest Interest Rate

In this method, you focus on paying off your highest interest rate debts first. The basic steps in this method include:

1. List all debts in order from the highest interest rate to the lowest interest rate.

2. Commit to paying the minimum payment on every debt.

3. Determine how much extra can be applied to the highest interest rate debt.

4. Pay the minimum amount plus the extra amount towards the debt with the highest interest rate until it is paid off.

5. When that debt is paid off, apply the amount you were paying to the debt that is paid off to the next highest interest rate debt until paid off.

6. Repeat until all debts are paid in full.

This method is the best method mathematically, as you will pay less interest in the long run.

Method #2 – Lowest Balance

In this method, your focus is on the debt with the lowest balance. Note: this method was made popular by Dave Ramsey and is often called the Debt Snowball method.

The basic steps in this method include:

1. List all debts in order from the smallest balance to the largest balance.

2. Commit to paying the minimum payment on every debt.

3. Determine how much extra can be applied to the smallest balance debt.

4. Pay the minimum amount plus the extra amount towards the debt with the smallest balance until it is paid off.

5. When that debt is paid off, apply the amount you were paying to the debt that is paid off to the next smallest balance debt until paid off.

6. Repeat until all debts are paid in full.

money-167733_640This method may not be the best method mathematically, as you will pay more interest in the long run. However, this method allows you to pay smaller debts off faster, which may give you the motivation you need to stick to your debt payment plan.

So, which method is best for you? It depends…

Method #1 is best for you if:

* You have debts with similar balances

* You have discipline to stick to your debt repayment plan

* You are a numbers person, and you realize the benefit of paying off the highest interest rate debt first

Method #2 may be best for you if:

* Your debts do not have similar balances – i.e., you have a $500 credit card balance, a $12,000 credit card balance, and several in between

* You need motivation – paying off the smallest credit card balance may be the motivation you need to stick to your debt repayment plan

* You don’t mind paying more interest over the long run in exchange for getting rid of smaller balances first

Tip: Why not use a combination of the two methods? Using a combination of both methods allows you to feel a sense of accomplishment by paying off that first debt (the smallest balance credit card), and gives you the motivation to start working on the next debt (the debt with the highest interest rate).

Remember, the method that works best for you is the one you will actually use. The most important thing is to make a plan and stick to it so you can live debt free.

Trade Management Equals Win Or Broke

Do you know that even though a group of traders buy the same stocks or options at the same time, some of them may become millionaires over time and some of them simply go broke?

All things equal, the most important factor that determines if you would become a millionaire (or billionaire?) or a complete loser over time trading in the stock markets is not how accurately you can pick stocks but how you manage your trades! Yes, portfolio management, or on a more micro scale, trade management, is the only factor that determines whether you make it or not in the stock markets!

Trade Management Example

John and Peter are 2 stock traders who agreed at the same time that XYZ company stock is bullish and decided to buy XYZ stocks together.

XYZ is trading at $10. John and Peter have $1000 each. John decided to put all his money into XYZ stocks and bought 100 shares of XYZ stocks. Peter decided to stick to his trade management strategy of using no more than 30% of his equity into any one trade. Peter then bought 30 shares of XYZ stocks.

As it turned out, stocks that are expected to go up usually come straight down. Instead of going up, XYZ company stocks fell from $10 to $6 within a few days. Both traders decided to sell their positions in order to preserve equity. John is left with $600 while Peter still has $880.

entrepreneur-1765834_640Both traders then bought ABC company stocks trading at $20 with the same trade management strategy. ABC rallied from $20 to $35 and both traders sold their positions. John is now up to $1050 while Peter is now up $1078. Peter remains ahead of John on the same moves while risking only 30% of his equity.

Both traders then bought RAT company stocks trading at $100 with the same trade management strategy and this time, RAT was delisted. Both traders lost all their equity in RAT Company. John is now left with nothing while Peter has $754 left.

The example above is based on the worst case scenario which is familiar to many veteran traders. You would see that Peter’s 30% trade management strategy reliably reduces losses and because he lost less money than John, he needs only make a lesser amount to beat John to it. Over time, Peter will out-perform John. See what I mean?

Trade Management – Conclusion

A sensible trade management strategy may not feel as exciting as throwing all your money in at every trade and it may also result in frustration when a stock does very well but on those much more times when a stock failed to perform, you would always be glad you stuck to your trade management strategy. As Rocky Balboa said, it is not about how hard you hit but how many hits you can take. A sensible trade management strategy ensures that you are able to take many hits and still not go down.

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