[For today’s post we’re going to presume you’ve already gone through non-debt expenses and strategized how to cut/decrease other categories to create a cushion between what you bring home and what you spend/owe others. Or taken on a side hustle or sold unused items around your home … ]
You’ve had your enough moment.
You’re done with being “normal,” with continuing to take on debt in order to achieve the American Dream.
You’re tired of the anxiety of paying debt payments every payday and having to sacrifice the goals and dreams of future you.
You want the debt gone.
You want to be able to stop giving your money to wise or not so wise decisions past you made.
First, an assignment:
Sit down and create a list of all the debts you owe – for most, that would typically include credit cards, installment loans, auto loans, student loans, medical bills, and your home.
This list should include the following numbers: total owed as of that date (including any pending balances), the minimum payment required, and the interest rate being assessed.
Most of us would look at that list and begin to panic about how on earth we’re going to pay all of it off.
Take a deep breath. Take a drink of water …
[Sidenote: regardless of which strategy you choose, you’ll continue to make the required minimum payment to all debts every billing cycle, even if it’s not the one you’re focused on.]
There are three common/popular strategies to choose from to tackle this mountain, however big or small it is.
1) Debt Snowball
This method has been popularized by Dave Ramsey, who I refer to as DR. There are very few things I agree with that are attributed to/come from the mouth of DR … the Debt Snowball is one of those in certain debt payoff situations where interest rates on your debt are fairly similar.
The snowball is this: once you’ve paid the essential bills (housing, utilities, food, and transportation) + made the minimum debt payments on all debts you’re responsible for, everything extra that you have left (short of a small buffer for unexpected expenses) goes toward the smallest debt balance.
The thought behind this approach is that it allows for quick psychological wins as you chip away at debts one by one and will stay motivated as you continue through your debt payoff journey.
However, the one negative to the snowball strategy is that you may end up paying a lot more in interest in the long run if you have a lot of high-interest debts.
Related to, but not entirely the same as the snowball strategy, is the snowflake payment. I’ve seen several people in the Debt Free Community refer to this term for when they have an additional amount of money in the budget beyond the original snowball – say that you were under budget on what you allocated for groceries or utilities – take that amount, no matter how small, and make a payment with it on the particular debt you’re tackling.
I’ve done this monthly in the past with our mortgage (which is not a high-priority payoff goal at this time) as well as my current auto loan. I have a goal amount I want to hit each month for the snowflake payment that I make as a principal-only payment after I’ve made the required payment for the month.
2) Debt Avalanche
Where the snowball is the smallest debt to the largest debt, the avalanche method is somewhat the opposite – instead, focus on the debt with the highest interest debt and work your way down the list to the debt with the smallest interest rate. This results in paying less interest over the long run. However, it also means it may take longer to achieve psychological wins of debt payoff if the higher interest rate debt has higher balances – thus you must stay disciplined when your motivation begins to wane.
The avalanche works the same as the snowball in that everything left over after you pay the essential bills + make the minimum debt payments on all debts you’re responsible for, everything extra that you have left (short of a small buffer for unexpected expenses) goes toward the debt with the highest interest rate.
3) Hybrid Approach
I’ve seen a variety of names for this approach, but the TL; DR (too long; didn’t read) of it is that you look at that list of debts and decide on an order that will not only give you psychological wins but also minimize the total amount of interest you end up paying on the debt.
You end up paying more interest than the direct avalanche route but less than a straight snowball, but this will allow you to tackle debts that emotionally will take a weight off of you sooner than if you stick strictly to one of the other two strategies.
Now, how to put this into practice if you’ve never made an extra payment on your debts:
On a credit card or an installment plan, make this extra payment amount like you would a typical payment – select the option that lets you enter the amount you want to pay (rather than the minimum payment or statement/current balance options).
On an auto loan, if you can pay this as a principal-only payment, do so; if not, make an extra payment.
On a student loan, make this as a principal-only payment unless you have an outstanding interest balance. Once that’s zeroed out, apply to principal only (some lenders offer to advance your due date; don’t do this!).
On a mortgage, make this as a principal-only payment so your money is not going towards interest.
