Why the Debt Snowball and Debt Avalanche Don’t Matter

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older couple sitting on couch holding heads and looking stressed over a pile of papers with calculator and laptop

Have you ever talked to anybody about your dream of getting out of debt? If so, did they ask if you were following the debt snowball or debt avalanche method? Maybe your confidence level dropped a few points because you had no clue what they were talking about.

Lucky for you, it doesn’t really matter what debt payoff plan you follow as long as you have a plan to get out of debt ASAP!

 

What All Debt Payoff Plans Have in Common

Every debt payoff plan shares the same two actions:

  • Make extra payments each month
  • Spend less money so you can afford those extra monthly payments

You already know that monthly payments aren’t fun and it’s time to finish them once and for all and finally escape the paycheck to paycheck lifestyle.

While you know how you got into debt–borrowing more money than you probably should have—you might not know how to get out of debt besides making the minimum monthly payment.

Whether you go after the smallest debt balance first, the loan with the highest interest rate, or you just want to make an extra payment whenever possible, you’re going to learn the keep it simple approach to getting out of debt.

 

How Soon Can You Get Out of Debt?

A lot has changed in your life since you borrowed your first dollar including your annual income.

If you haven’t already done so, you need to ask yourself this question, “How soon can I get out of debt?”

You can find out that answer by using a loan payoff calculator that compares your current monthly payment amounts to your future monthly payment. Even if you’re on a tight budget and can only pay an extra $50 each month, you still save hundreds or thousands of dollars in interest. #Savvy

 

How Much Money Can Extra Payments Save on Your Debt Payoff Journey?

Need some visual proof to motivate on your debt payoff journey?

Let’s say you have $10,000 left on a personal loan with a 12% interest rate with five years to repay. You’ll pay $3,346 in total interest on that balance with a monthly payment of $222.

If you contribute an extra $50 a month, you’ll repay the loan a year early and save $824 in interest as well. You’ll save even more in interest with even bigger payments that you can eventually work towards.

 

Get a Lower Interest Rate on Your Loans

Another way to get out of debt sooner instead of later is to refinance your loans for a lower interest rate. You can keep the same loan payoff date but negotiate a lower interest rate because your annual salary and credit score are both higher than when you originally applied for the loan.

Getting a lower interest rate is the equivalent of making extra payments because you can continue making your old monthly payment, but the additional amount will be applied to the principal instead of the accrued monthly interest.

For example, dropping the interest rate on that same $10,000 loan from 12% to 8% reduces your monthly payment from $222 to $202 and you save $1,200 in interest too.

If you’re aggressive about getting out of debt even sooner, make an extra payment whenever possible to save even more in interest.

 

When to Start Making Extra Payments

You need to start making extra loan payments as soon as possible because every dollar for extra principal payments today means less interest you’ll pay tomorrow. This is very important to understand in your debt payoff journey! The lender might not be happy because they’re not making as much money, but you and your wallet will be!

If you have several different types of debt, like a mortgage, student loans, credit cards, and personal loans, focus on the highest interest rates first because those loans usually accrue the most interest each month dollar for dollar.

If you’re still not sure how much extra you can pay each month, take a good look at how you spend your money each month and see where you can cut back. Some of the obvious starting places are cable tv, Starbucks, and the gym membership you rarely use. The money you save can now be applied to your loans.

It’s never good to “just throw money away” but cutting spending to get out of debt sooner can be the motivation you need to finally take control of your finances.

Don’t Forget about Lump Sum Payments

It can be really easy to primarily focus on monthly payments instead of the lump-sum payment when money is tight.

You might not be able to repay an entire loan in full with your Christmas bonus or selling your boat, but it can make a serious dent. If you have unused possessions cluttering up your house, sell them and use the cash to make an extra loan payment. Even doing this once or twice a year is better than nothing.

Consider a Side Hustle

If you have some extra time during the evenings and weekends, you can also pursue a side hustle to earn some additional cash that can make those extra monthly payments. This will help speed up your debt payoff significantly! For many of us, it’s easier to make more money than spend less money if you’ve already spending to the bone.

 

Save for Retirement or Get Out of Debt First?

This question alone is a debate for a different day, but you should be saving for retirement and trying to get out of debt at the same time. For starters, invest enough each month to earn the entire employer 401k match if that option is available to you or invest at least $100 in a tax-advantaged retirement account if you don’t have matching 401k contributions.

As a general rule of thumb, the stock market has a historical return of approximately 8% each year. If you have any personal loans or credit card debt, those interest rates are most likely higher than 8% so you’re better off paying the high-interest debt first.

Once you get down to your “low interest” debt like home mortgages, you might consider making extra monthly payments still, but you might channel some of the extra money you used to pay off your consumer debt to be invested for retirement since your potential investments returns are higher.

 

The Secret to Getting Out of Debt

You don’t have to make a lot of money to afford large extra payments or even refinance your loans for a lower interest rate to get out of debt early. The secret is being intentional about getting out of debt.

Just like you did whatever it took to win the favor of your spouse, land that promotion, or get into your dream school, the motivation to get out of debt goes a long way. Maybe this motivation has been in your belly for some time now, but you didn’t know how to capture it.

The first step to getting out of debt is comparing how much you currently pay each month in loan payments to how much you could be paying.

After figuring out all the ways you can save money, getting the lowest interest rate possible, and setting your target date to be debt free, then you can decide which of the debt repayment strategies like the debt snowball, debt avalanche, biweekly payments, or double payments is the best option for you.

At the end of the day, getting out of debt is more important than how you get out of debt. So, crunch some numbers and make a plan! The sooner you start, the more money you get to keep in your pocket, and the less stress you will have about your financial situation.

Joseph Hogue worked as an equity analyst and an economist before realizing being rich is no substitute for being happy. He now runs multiple websites in the personal finance and crowdfunding niche, makes more money than he ever did at a 9-to-5 job and loves building his work from home business.  He can also be found over on YouTube.


What debt repayment method do you use?

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Hey, we are Kelan & Brittany!

We paid off $25,000 of debt in only 5 months using our blog! Now we help other families do the same. Let us help you manage your money, control your life, and most importantly, find your freedom!
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