Are you stressing over the next credit card bill coming in because you don’t know how to cover it? Can you feel the stress of living paycheck to paycheck and watching your money move out of your account faster than it comes in? Is your Amazon addiction causing serious harm to your bank account? Take a breath. I’ve been there and I’m here to help. I’m going to introduce you to your Debt Freedom Plan.
Here are the two top methods for you to look at!
Two Methods To Tackling Debt
Like with anything else in life, in order for us to get ahead, we first need to plant our feet in the ground and take stock of where we’re at. If you haven’t taken the time to write out what your debts are, along with your monthly payments, then I want you to do that first. You can’t know where you are going until you know where you’re at.
That is where the Debt Freedom Plan comes in.
The information I will give you here will help you get rid of the anxiety that has been building up in your chest. This will provide you with a starting point to build out your debt freedom plan and get out from under the chains of high-interest debt once and for all.
If that sounds good to you, then I want to introduce you to these two lovely concepts. The first is termed Debt Snowball. This was thought up by Dave Ramsey, who has made a name for himself by helping individuals get out of debt. I love the name, and you will understand the meaning behind it here soon.
The second one we will look at is defined as Debt Stacking or Debt Avalanche. The concepts are similar, but they do have differing effects. Are you ready to dive in?
I know what it’s like to have a massive amount of debt. At one point, I had over $30k in credit card debt, a car I couldn’t afford, and over 6 figures in student loan debt. This was because I was in a high paying job, and even though I should’ve known better, I was living that “keeping up with the Jones'” method of life. I felt like I was “wealthy enough” to afford whatever I wanted, so I never questioned my Amazon purchases, random shopping trips for new clothes for the kids, or throwing dinner parties for my friends.
Take my advice, don’t do this. You will never be able to retire if you don’t build out a financial freedom roadmap. It takes a lot of discipline to take aim at your goals and to see it through. If you find yourself under pressure to drive fancy cars and keep up with your neighbors, I highly recommend reading or listening to The Millionaire Next Door – it was transformational in helping me to understand what truly wealthy people acted like vs upper middle class people who are typically drowning in debt to “look wealthy”.
So what is the Debt Snowball?
Debt Snowball is a strategy used by folks to help them get out of debt more quickly. You do this by first putting together a list of all of your debts. This could include any and all credit card debt you have, a car loan, student loans, a mortgage, any personal loans you carry, and any other type of debt held in your name.
After you draw up the list, you want to find out what the totals are for each of these debts. With the debt snowball method, the interest rate for each of these debts really doesn’t matter. You want to list the debts in order from the lowest balance to the highest balance.
| Debt Snowball Plan Example | ||
| Debts | Payments | Balances |
| Credit Card 1 | $240.00 | $12,000.00 |
| Credit Card 2 | $120.00 | $6,000.00 |
| Mortgage Loan | $1088.00 | $160,000.00 |
| Car Loan | $444.00 | $25,000.00 |
| Personal Loan | $2224.00 | $213,000.00 |
| Total |
In this example, you can see that that the lowest payment is the second credit card payment, coming in at $120. Let’s not worry about the mortgage for now. Your mortgage is a large debt and by some, is still considered to be good debt. We will focus on both credit cards, the car loan, and the personal loan for now. In a future post I’ll talk to you about a great way to tackle all your debt AND your home loan at the same time by utilizing a HELOC.
To make the Debt Snowball effective, if you have an additional $50 a month to help pay down debt, you would add it to the $120 payment until it is paid off. When you pay off the second credit card, you will now take the total from the $50 you added to pay down debt. The $120 from the second credit card payment and add that to the first credit card payment which was $50.
So instead of paying $240 a month, you now have $410 to put toward debt. This will help you to quickly pay down that credit card as well. That just now freed up $650 a month in expenses, but we’re not done yet. If you take that $650 and add it to the personal loan of $332, you will now have $982 paying off the personal loan. That is almost three payments in one!
Last, we take that newly freed up $982 and pay it against the car loan of $444. Now you have $1,426 a month going against your car loan. Once you have that paid off, you have a few options. You can now take that $1,426 and invest it, or you can use that to pay off your mortgage or split the difference between the two options.
I bet you’re thinking, how long would this take vs just paying on all the debts evenly? Well, let us take a look. The best way I can recommend doing this is by going to the Nerd Wallet Calculator and plugging in your numbers.
In this example, though, we were able to shave off 6 years and 8 months of debt through the snowball method. So, instead of paying the minimums and being debt-free by June of 2032, we will now be debt-free by October of 2025. This comes with total savings in the interest of $12,488, all by using debt stacking.
This does not include paying off the mortgage as that will come later. However, if you take the additional cash and put it against the mortgage, you will find that you could ultimately be debt-free in less than 10 years.
That sounds pretty great, right? It is. Debt is one of the biggest struggles that American’s face. We are in a society that has been inundated with marketing that makes us believe it is okay to buy now and pay later. We don’t have people teaching us the real cost of paying later.
Can you imagine what you could do with that $12,488 in saved interest?
It is pretty mind-blowing when you think about it.
The Debt Avalanche Method
Now we are going to switch gears and take a look at Debt Avalanche. These two debt freedom paths are very similar. The only significant difference is how each handles the repayment of debt.
In the debt snowball option, we take the lowest balance and pay it off as quickly as possible. The good thing about this is that it will give us more immediate gratification. We can start checking off boxes sooner, potentially. This provides us with several small wins, which is essential to help us stick to a process.
With debt avalanche, however, you change it to pay off the debt with the highest interest rate. It doesn’t matter which option you choose. The more money you have, the faster you will be able to pay down the debt.
| Debt Snowball Plan Example | |||
| Debts | Payments | Balances | Interest Rate |
| Credit Card 1 | $240.00 | $12,000.00 | 21.99% |
| Credit Card 2 | $120.00 | $6,000.00 | 15.99% |
| Mortgage Loan | $1,088.00 | $160,000.00 | 3.25% |
| Car Loan | $444.00 | $25,000.00 | 2.50% |
| Personal Loan | $332.00 | $10,000.00 | 12.00% |
| Total | $2,224.00 | $213,000.00 |
We would pay down the credit card with a 21.99% interest in the scenario above for debt avalanche. As with the previous example above, we will take the extra $50 we had and use it against credit card 1 as it has a higher interest rate. When the first credit card has been paid off, we move to the debt with the second highest interest rate, where we would add the $50 we freed up to the minimum payment we were already paying on it. That would free up $290 that would now go against credit card number 2.
The second card would now have $410 going against it monthly until it has been paid off. As you can see, the outcome here would be somewhat similar. That newly freed up $410 would now be added to the $332 of the personal loan to try and quickly pay that down, as it has the third-highest rate of interest.
I bet you can guess what we do next, right? That’s right, the $742 we now have freed up gets added to the $444 in car loan debt. Now you get $1186 paying down that debt quickly.
Now, this is a pretty simple example, and yours is likely to be much more complicated. Each method tends to have its benefits. If you are someone who likes small victories, then you should definitely stick to the debt snowball.
Each time that you knock out a new debt it’s like a little Christmas present to yourself. It still takes a lot of discipline to work through it. You get to knock out a lot of smaller debts quickly for a quick shot of dopamine.
If you are a highly disciplined person and you are looking for a way to get out of debt more quickly, then the debt avalanche method is your better choice. By knocking out the higher debts, you’re saving on the overall interest that you are paying. As you keep knocking out those debts faster and faster, you can pay down your total debt more quickly.
So what are the next steps?
This is going to be the most challenging part. If you are drowning in debt, it is okay. We need to start by plugging the holes in your ship. For some of you, this may be the most eye-opening thing that you have ever done, but I don’t want you to freak out.
If you are single, I want you to get a current statement of all of your debts and set aside an hour for this. If you are married or if you have a partner, it is best that both of you get together, get a list of all of your debts, and set aside an hour or two to map out each debt.
You will want to know how much you owe and what your minimum payments are for each account. You will also want to see each account’s interest rate and then discuss which debt freedom method you would feel most comfortable tackling.
For some of you, this may be a simple task. For others, seeing all of that debt could cause you to want to change your identity and run away to a land where no one knows who you are. Remember, I had run up over $60,000 in a car loan, over $100,000 in student loan debt, a lease on a second car I never used, $30,000 in credit card debt, and so on. I know just how intimidating this step can be. Just make sure that you take the first step. I promise, it gets easier once you take that first step.
Once you have all of your information and decide on the method you will use, I want you to figure out the maximum amount you can set aside each month. This amount shouldn’t leave you in dire straits. Make sure it’s an amount you can commit to. Use that to start funding your debt freedom plan. The more you can set aside, the faster you will be free of the shackles of debt.
Final Thoughts
I know this is a lot of information to take in. I know it can be scary. You can see here that we just went through different paths to help you reach the first stage of financial success. Debt freedom is where we need to start on this journey.
Whether you decide that you want to use the debt snowball path because it is easy and will bring you quick wins, or if you’re going to do the debt avalanche, it doesn’t matter to me. The only important thing is that you take the first step.
“A journey of a thousand miles begins with a single step.” – Lao-Tzu
Take that first step. You’re worth it, and I believe in you.
If either of these methods help, please reach out and let me know. I enjoy hearing all of your success stories!
If you’re well on your journey to getting out of debt, then take a look at the power of compounding interest article for the next step in your journey.
Like always, if there is anything that you would like to learn more about or if there was something that I didn’t touch on, please reach out to me at renaeinmaine@gmail.com
Disclaimer: Just My Little Mess does not provide tax, investment, or financial services and advice. The information is presented without considering the investment objectives, risk tolerance, or financial circumstances of any specific investor. It might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.