Saturday, 18 July 2020

3 Debt Payoff Strategies - Avalanche, Snowball, Snowflake


In this article, I am going to share with you three different debt payoff strategies you need to know about. If you are someone in debt, you can follow one of this strategy to pay off your debt



1. Debt Avalanche

Even though it is not exactly my personal favorite debt payoff strategy, it is the one that makes the most financial and logical sense. So how the debt avalanche strategy works? let's say you have three different debts. They all have different amounts, and they all have different interest rates.
  • Debt 1: $10,000 - 3% interest
  • Debt 2: $5,000 - 5% interest
  • Debt: 3: $1,000 - 10% interest

With the Debt Avalanche, you would attack the most expensive debt first, so that means the debt that is charging you the highest interest rate first, in the example that I just gave, it would be the $1,000 loan that is charging you 10%. Ten percent is the highest interest you're being charged on all three debts, so that is the one that you would focus on. Once that is paid off, you would move on to the second most expensive debt which would be the $5,000 loan that is charging you 5% interest. And then once that is paid off, you would move on to your last debt
  • Debt: 3: $1,000 - 10% interest
  • Debt 2: $5,000 - 5% interest
  • Debt 1: $10,000 - 3% interest

Remember, it is not just about paying off one and ignoring the others. In this strategy, you are always paying minimum owed on all of your debts, but it's just so you can focus on attacking one, and getting that out of the way, and then number two, and then out of the way, and so on. Usually in this strategy, you're also putting more than the minimum on that first debt that you want to crush. Let's say the minimum for $1,000 debt which has the highest interest rate is $10 a month, you would want to pay as much as you can comfortably afford within your budget, and then once that is paid off, that same amount that you were putting on debt number one, you would move over to debt number two which is $5,000 with 5% interest, and then the same thing would happen to $10,000 with 3% interest.


2. Debt Snowball

Similar to the Avalanche, but a little bit different. Personally, it is one of my favorite ones. When I am working with clients and they have a bunch of different debts, and it becomes very overwhelming. This makes more psychological sense, it really is not just about numbers. There's a lot of things that go into it, like emotions, how you feel about yourself, self-confidence, guilt, shame, there's a lot of feelings, and it can be very difficult to do the debt avalanche even though it makes more logical sense. Of course, attack the one that has the highest interest rate, that is charging you the most money, why wouldn't you want to try to pay that off first. Well, if the example I gave was reversed., And the $10,000 loan was charging you 10%, and that was the one that you need to focus on, even though you had two other debts of $5,000 and $1,000 debt. It might feel like you're never going to pay off that first expensive debt. Wouldn't it be nice if you could just focus on paying off that small $1,000 debt first? And then you don't have three loans to focus on, you've got just two.

Well, that is exactly what the debt snowball strategy is all about. It is focusing on paying off your smallest debt first, and then your second smallest, and so on and so forth. For me, this makes sense because it gives you that first little win if you have been ignoring your debts for a while, and you just don't feel like you can do this because you've been living with debt for so long. Paying off that smallest debt first will give you that win that you're looking for, it'll give you that extra motivation to keep ongoing. Typically, when I present these two options to people, you would probably assume that they would choose the first one, it is very popular, it is very logical, but almost everyone chooses the debt snowball. There is nothing wrong with choosing one over the other. 

The whole goal is just to become debt-free. So it really does not matter, if you pay a little bit more interest by doing the debt snowball, again, personal finance is personal, do whatever makes you feel comfortable, and do whatever strategy you know that you can actually accomplish. If you feel like debt avalanche, that is not for me, I don't think I can do that, debt snowball sounds a little bit more interesting, then do the debt snowball. It doesn't matter what anyone else tells you or what anyone else is doing, do whatever makes the most sense for you.


3. Debt Snowflake

It is a strategy that you would do in conjunction with the debt avalanche or the debt snowball strategy. The debt snowflake strategy is straightforward. It just means that whenever you get some unexpected found money, then you don't just spend it or put into savings, you actually use it to pay off your debt more aggressively. Found money can be a lot of different things, if you get a tax refund, if you get some birthday money in the mail, if you get a bonus at work, if you have a side hustle once in a while you work weekends for some company, you can use that money to pay off your debt. Whatever extra money that comes in, you can throw at your debt. That is taking part in the debt snowflake strategy.






Conclusion

Those are the three debt payoff strategies that you should know about. If you are currently dealing with some debt, guess what? You're not alone, and you can become debt-free too. No matter how much you owe, don't feel like just because you've been living with debt for so long, that's your life now and you can never get out. There's always a solution, it's really just about educating yourself about your options and then start getting to work. It's not going to be easy, there's going to be a lot of sacrifices involved, and you will have to maybe live a little bit leaner than you're used to until you become debt-free or on your way to becoming debt-free. But what I've seen with so many people is, when you do become debt free or you crush one of those big loans that have been bugging you for so many years, there is no better feeling in the world than having that weight lifts off your shoulders.

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