How To Get Out Of Debt: Paying Off Debt with The Debt Snowball

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debt snowball vs debt avalancheWe all hate being in debt, yet most of us find ourselves there at some point in our lives. Whether it’s student loans, mortgage, credit cards, payday loans or anything in between. When we find ourselves drowning in debt we start scouring the internet for all sorts of debt payoff solutions. Inevitably, we see the insane amount of debt forgiveness and debt consolidation sites, but in my experience, anything that sounds too good to be true probably is. What you are really looking for is a bulletproof strategy to get out of debt quickly and efficiently without destroying your credit. That’s where the Debt Snowball and the Debt Avalanche come into play!

The Debt Snowball

What is a debt snowball? The debt snowball is a really powerful debt payoff strategy. The concept is for you to pay off your debts from smallest to largest while maintaining the minimum payments on all. Each time a balance is cleared you roll that payment into the next smallest balance. As for the why it’s called a debt snowball, it’s because if you roll a snowball down a hill it keeps getting bigger and more powerful as it goes, which is exactly what is happening with debt pay off.

The 5 Simple Debt Snowball Steps:

  1. Take the list of your various debts and sort by the balance, lowest to highest
  2. Set all to the minimum payment
  3. Identify the total available for debt payoff…every extra dollar helps!
  4. Apply all extra funds toward the smallest balance each month
  5. When you pay off the balance, roll into the next highest balance

Each time you pay off a balance, you then take the amount you were paying toward that bill and add it to the next bill.

Here’s an example using Nerd Wallet’s Debt Snowball Calculator:

Assume you have $490 owed toward the minimum payments each month. Also, assume you have $700 available to apply toward the following balances each month. What most people do is spread this extra $210 across all the balances and pay down the balance too slow to make any real progress. Follow along for the better way!

debt snowball vs debt avalanche

Step 1: Set all the payments at the minimum which totals at $490 per month.
Step 2: Take the remaining $210 and apply it toward ‘Personal Loan’ each month until its paid off in month 4. The debt snowball starts with $230 ($210 + $20 min. payment) freed up every month.
Step 3: Time to pay off ‘Credit Card 1’. Add the $230 to the $50 min. payment each month until its paid off in month 11. The debt snowball upgraded to $280!
Step 4: On to ‘Credit Card 2’. Add the $280 to the $135 min. payment each month until its paid off in month 24. Your debt snowball is now a whopping $415!
Step 5: Time to pay off the ‘Car Loan’. Add the $415 to the $285 min. payment each month until its paid off in month 38.
Step 6: Start investing that freed up $700 per month and buy your freedom!

You have now successfully paid off $23,500 in 3 years and 2 months with nothing more than $700 each month. You saved $2,861 interest and paid off your debt 2 years faster than if you just paid minimum payments!

Add more than $700 each month and watch how quickly your debt snowball crushes this debt! Don’t have an extra $210 each month? Every spare dollar makes an impact! So even if you can only spare an extra $10 each month, that is the beginning of your debt snowball.

The Debt Avalanche

For all of the ultra optimizers, you are scratching your heads asking why I didn’t incorporate the interest rate into the payoff strategy. The debt avalanche is for you!

The debt avalanche is very similar to the debt snowball in the fact that you pay the minimum payment toward all balances not immediately being paid off. The big difference is in the way you order your debt. Instead of starting with the smallest balance, you start with the highest interest rate.

The 5 Simple Debt Avalanche Steps:

  1. Take the list of your various debts and sort by the interest rate, highest to lowest
  2. Set all to the minimum payment
  3. Identify the total available for debt payoff…every extra dollar helps!
  4. Apply all extra funds toward the balance with the highest interest each month
  5. When you pay off the balance, roll into the balance with the next highest interest

Each time you pay off a balance, you then take the amount you were paying toward that bill and add it to the next bill.

Let’s use the same example as above using Nerd Wallet’s Debt Snowball Calculator:

debt snowball vs debt avalanche

Step 1: Set all the payments at the minimum which totals at $490 per month.
Step 2: Take the remaining $210 and apply it toward ‘Credit Card 1’ each month until its paid off in month 8. The debt snowball starts with $260 ($210 + $50 min. payment) freed up every month.
Step 3: Time to pay off ‘Credit Card 2’. Add the $260 to the $135 min. payment each month until its paid off in month 22. The debt snowball upgraded to $395!
Step 4: On to ‘Personal Loan’. Add the $395 to the $20 min. payment each month until its paid off in month 23. Your debt snowball is now a whopping $415!
Step 5: Time to pay off the ‘Car Loan’. Add the $415 to the $285 min. payment each month until its paid off in month 37.
Step 6: Start investing that freed up $700 per month and buy your freedom!

You have now successfully paid off $23,500 in 3 years and 1 month with nothing more than $700 each month. You saved $3,048 interest and paid off your debt 2 years and 1 month faster than if you just paid minimum payments!

The Compromise:

So what if you want the psychological wins achieved from seeing “amount owed: $0.00” and want to stop getting clobbered with high-interest balances? Then this compromise is right up your alley. First organize all of your debts by interest rate, highest to lowest. Then look to see if there are any outliers like our ‘personal loan’ from the example above at $1000. We saw in the debt snowball example that if you focused your attention on paying off that $1000 balance it would be gone in only 4 months. Then you start your debt avalanche.

Obviously, that means 4 additional months paying higher interest on another balance. However, that psychological win will make you feel like your hard work is really paying off and will encourage then propel you to knock out the next debt!

The Summary:

The debt snowball strategy is my favorite part of debt payoff because the psychological win gives you a fantastic feeling every time you pay one off and begin rolling it into a bigger payment toward the next one.

The debt avalanche strategy is more efficient but comes at a price since you tend to lose the small psychological wins that come from paying off the smaller balances first. Unless the smallest balances are also your balances with the highest interest rate.

The hybrid approach between the debt snowball and avalanche is probably as close to the best of both worlds. It allows you to mainly focus on the debt avalanche strategy by paying off the highest interest balances first but also allows you to skip the line if there are some small balances that could be cleared quickly. Do not undermine the psychological wins that come from clearing balances down to $0.

-D-

2 thoughts on “How To Get Out Of Debt: Paying Off Debt with The Debt Snowball”

  1. -D-

    Great article on the debt snowball and debt avalanche payoff solutions. While I am debt free now, I wasn’t always. I think these are both great strategies for those who have fallen farther into debt than they ever intended to. While I am an ultra optimizer, the more I read about the psychology behind the little wins (especially with money), the more I think the debt snowball is a great solution for the masses. We have such a need for instant gratification. I compare it to going to the gym. If you see a few results right away, even if it is just water weight, you. are so much more excited to keep moving forward. The same goes with debt. The more you can fight off early on, the more you want to keep going. Thank you again for the great information.

    Mr. TTF

    1. ourtrialbyfire

      Thanks Mr. TTF and great analogy with the gym results! I feel that even though we are working toward the big wins its the little wins that help keep us on the right path.

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