When I initially started to pay down debt, which was credit card debt (back in 2017), I learned the debt snowball method, which is a highly popular debt payoff method in personal finance. The debt snowball method is where you use any extra funds available to pay off your smallest debt, while only paying the minimum on all other debt. Once your smallest debt is paid to $0, you snowball that payment along with any extra funds into the next smallest balance. You continue this strategy until all balances are paid to $0. So you know an example is coming (I just love examples, what can I say I’m a visual person!) Let’s say you have a total of $19,000 in debt with various interest rates:
- $5,000 (22%, minimum payment $115)
- $2,500 (12%, minimum payment $50)
- $7,000 (29%, minimum payment $175)
- $4,500 (24%, minimum payment $95)
I entered the interest rates because we’ll use those in an example further down. With the debt snowball method here’s the order in which you would pay down this debt assuming that in addition to your minimum payments you had an extra $50 to pay towards your debt:
- $2,500 (minimum payment of $50 + additional $50= $100) every month until paid in full then you’ll snowball that $100 into your next highest debt.
- $4,500 (minimum payment of $95 + additional $100 = $195 from previous debt) continue on to next debt until all are paid in full.
- $5,000 (minimum payment of $115 + additional $195 = $310) then on to the last debt, the largest.
- $7,000 (minimum payment of $175 + additional $ = $485) pay this amount until paid in full.
With an additional $50 and the debt snowball method it would take 83 months (6yrs and 9 months) to pay off this debt instead of 149 months (12yrs and 4 months). The interest paid with this method would be $21,013.40, a savings of $12,618.40 from the original payment method. Also you can see, by the time you get to the largest debt you have a much larger payment amount to throw at that balance. This is a great method and has been proven to work for those in debt. According to Dave Ramsey “when you see the plan working, you’re more likely to feel like you can stick it out. And when you keep at it, you’ll succeed in becoming debt-free!” Ramsey also says, ” Winning with money is 80% behavior and only 20% head knowledge.” I would definitely have to agree with him on this. Changing our financial behaviors is what will ultimately make us successful with reaching our financial goals.
Now after using the debt snowball to pay down over $10,000 in credit card debt, I have recently found a new more financially savvy way to pay down debt. The debt avalanche, which is when you pay down your debt from the highest interest rate down to the balance with the lowest interest rate. So for example, using our same numbers from above, but listing them from highest interest rate to the lowest:
- $7,000 (29%-$175 minimum payment)
- $4,500 (24%-$95 minimum payment)
- $5,000 (22%-$115 minimum payment)
- $2,500 (12%-$50 minimum payment)
With the debt avalanche method in this example it would take 76 months (6yrs and 3 months) to pay off this debt instead of 149 months (12yrs and 4 months). The interest paid with this method will be $17, 661.20, a savings of $15, 970.78 from the original payment schedule and a savings of $3,352.39 from the debt snowball method. So in the end, not only does the debt avalanche save you a significant amount on interest it also decreases the amount of time you’ll be paying down your debt. What could you do with an extra $3,352.39?
Since I am laser focused on achieving my financial goals and want to optimize my savings it’s debt avalanche for the WIN!!! That’s extra savings that I’ll have to throw at my mortgage once I start to tackle it. Although the debt avalanche is the method I am currently using, I suggest you use whatever method will help you ultimately achieve your financial goals. Choose the method that is doable and the one that you’re most likely to stick with. I know this phase of achieving financial independence can be long and boring but just stick to the plan and trust the process, the finish line is closer than you think!
If you’re in the process of paying down debt please leave me a comment and let me know what method you’re using and how it’s working for you.
Lastly, if you would like to do some calculations of your own this is a great debt snowball calculator. Just follow the instructions and see your results.
Until Next Time,