It’s hard to watch your hard-earned money circle the drain in a perpetual cycle of monthly payments. There goes $25 for your credit card, $100 for student loan repayment, and $50 for that not-so-new new car you purchased five years ago. Bon voyage!
It’s so much easier to pay the required monthly minimum payment to chip away at your debt. After all, that’s your hard-earned money, and you’d like to keep at least some of it.
Regardless, if you’re in debt, not all of the money you earn is entirely yours. You owe the lenders the amount of money you borrowed from them, plus interest. And that’s where the problem lies. Here’s why interest should interest you: it’s additional money you have to pay back just for the time you spend indebted. The only way to spend less in interest is to spend less time in debt.
While debt doesn’t necessarily go down easy, there are ways to prioritize debts while contributing a small amount of extra cash in your monthly budget to pay them off faster and become financially free.
The Debt Snowball Method
The debt snowball method is a strategy in which you prioritize your debt according to total balance, disregarding interest rates.
How It Works
The first step of the debt snowball method is to organize your debts from the smallest balance to the highest while taking note of the minimum monthly payment required for each debt. Here’s an example:
- Credit card payment – $200 total, $25 monthly
- Auto loan payment – $1,000 total, $50 monthly
- Student loan payment – $2,000 total, $100 monthly
Debt 1: The first debt you would aim to tackle is your credit card payment. Using the debt snowball method, you will want to pay more than the minimum of $25. If you have room in your budget to double this payment (making it $50) in addition to the $150 needed to cover your other monthly payments, then do so. However, increasing your minimum by any amount is fine.
For simplicity’s sake, let’s assume that you will pay $50 a month towards your credit card until it’s paid off.
Debt 2: Once you’ve paid off your credit card debt, it’s time to conquer your auto loan. If you could afford to pay your credit card debt at $50 a month until it was paid off, in addition to your minimum auto and student loan payments, then you should be able to afford to contribute that $50 to your auto loan.
Add the $50 you would have used for your (now paid off) monthly credit card debt to your $50 car loan payment, totaling $100. Pay $100 a month towards your car until it is paid off. All the while, you will continue to pay the minimum $100 a month needed for your student loans.
Debt 3: Now that your auto loan has been paid off, use the $100 you were applying towards your monthly car payment towards your student loan payment, totaling $200. Dedicate $200 to your student loan debt until it’s paid.
The result? You should have been able to pay off each debt much faster than you would have by paying the minimum payment for each loan by snowballing your payments.
For instance, this is the time needed to pay off loans with the snowball method:
- Credit Card – $200/50 = 4 months
- Auto Loan – $1,000/100 = 10 months
- Student Loan – $2,000/200 = 10 months
Opposed to the time needed to pay off loans using only minimum payments:
- Credit Card – $200/25 = 8 months
- Auto Loan – $1,000/50 = 20 months
- Student Loan – $2,000/100 = 20 months
By using the snowball method and doubling your smallest monthly payment, you can cut your time spent in debt in half! Not bad!
The Debt Avalanche Method
How It Works
The first step you need to take to trigger your debt avalanche is to organize your debts from the highest interest rate to the lowest while taking note of your monthly payments. For example:
- Credit Card – $1,500 total, 10% interest, $50 monthly
- Student Loan – $5,000 total, 6% interest, $100 monthly
- Auto Loan – $5,500 total, 4% interest, $150 monthly
Like the snowball method, you will have to pay more than your minimum monthly payment. If you have $100 to spare, put all of it towards your credit card debt. You will then be paying $150 a month for your credit card until it’s paid off in addition to your other debts’ monthly minimums.
From here on out, the avalanche method follows suit with the snowball method. Once your credit card is paid off, you will then add the $150 you would have used for that monthly payment to the minimum payment of the debt with the second-highest interest: the student loan. So, you would pay $250 monthly for your student loans and then $400 monthly towards your auto loan once the student loan is paid off.
The reason this method will save you more money is that you will be paying less in interest over time. By knocking out the debt with the highest interest first, most of your money will be dedicated to the debt amount itself, rather than the accruing interest that builds up the longer you have said debt.
The Debt Snowflake Method
How It Works
Did you get $50 for your birthday? Snowflake your debt by contributing your newly acquired $50 to your monthly payment. Did you unexpectedly split a dinner bill with your friend? Put the $10 you saved straight towards your debts. Find a $5 bill in your pocket? Use that as a random debt payment. Small payments here and there may seem insignificant, but a light dusting of snow can turn on a dime and transform into a blizzard.
However, what may pose a threat to this strategy is the delicate nature of the snowflake. They melt. Small bits of money—and the willpower needed to put them straight towards debt instead of a quick coffee here and there—are fleeting. Stay disciplined and keep your sights set on your zero-debt day to make this method work to your advantage.
If you’re the kind of person who stays motivated by accomplishing shorter-term goals more often, the debt snowball method is probably for you. If higher interest rates are making you feel uneasy, the debt avalanche is a fast way to eliminate debts altogether before those interest rates take their toll. If you can’t spare more than your monthly minimum debt payments, the snowflake method requires less of a regimented commitment, allowing you to give what you can when you can.
Sometimes our debts pile up. Let it snow with whatever debt repayment strategy accommodates your goals. With a little discipline and strategy, you will eventually shovel yourself out.
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