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  • Writer's pictureRyan Jones

Ready to climb out of debt? Here is how.

Got debt?

Ready to attack it?


Here you go. Simply do the following.


1. Stop taking on new debt.


2. Create extra cash to attack the debt.

  • Create more income (bonus, overtime, side hustles, selling stuff, etc.)

  • Budget your cash flow (cutting expenses, negotiate bills down, etc.).

3. Use one of the debt attacking strategies.

  • Debt Avalanche

  • Debt Snowball

Let’s focus in this blog on the last two points, the two strategies for attacking your pile of debt.


There is the financial (mathematical) way sometimes known as the “Debt Avalanche,” or the human behavioral way, sometimes known as the “Debt Snowball,” coined by Dave Ramsey.


The Debt Avalanche sorts and attacks debt based on interest rates, from highest to lowest.


The Debt Snowball sorts and attacks debt based on payoff amount, from lowest to highest.


After sorting, you have an order to pay your debts. The debt at the top of the list receives what you have been paying as a minimum and any extra money you can throw at it. For all other debts on your list, they get the minimum amount due.


Once debt 1 is paid off, you take what you were paying against debt 1 and add that to the minimum you are paying on debt 2. Continue to debt 3 and beyond, depending on the number of debts owed.


At all stages, you are attacking the debt with the same total amount you can afford to attack it. Unless your situation changes, where you have more or less extra money to attack the debt. The strategy is still the same.


Since some of those reading this might be learning for the first time, let me briefly explain both. With an example and some visuals.


 

Example

You have 4 debts: 2 credit cards, a student loan, and a car loan, with the following breakdown (see table). You can add $200 “extra” to attack your debts. All numbers are made up, but interest rates and minimums are based on average industry standards.

Using the Debt Avalanche approach, you would pay off these debts in the following order based on highest to lowest interest rates: CC1 (16.99%), SL (4.3%), Car (2.65%), and last, CC2 (0%). You would pay $200 + minimum payment towards debt CC1 until it’s paid off. For all other debts, you just pay the minimum. After the CC1 debt is paid off, you avalanche what you were paying on debt CC1 into your minimum payment on your next debt SL. Repeat until all the debt is paid off.


Using the Debt Snowball approach, you would pay off these debts in the following order based on lowest to highest payoff rates: CC2 ($300), CC1 ($2,050), Car ($11,200), and last, SL ($23,000). You would pay $200 + minimum payment towards debt CC2 until it’s paid off. For all other debts, you just pay the minimum. After CC2 debt is paid off, you snowball what you were paying on debt CC2 into your minimum payment for the next debt CC1. Repeat until all the debt is paid off.


This example is demonstrated in table illustrations in the appendix of the blog.


 

Now that you see how these strategies work, let’s talk about the advantages of each.


The advantage of the avalanche is that you are attacking debt where you are giving the most money away (interest paid), and most of the time, this is consumer debt (bad debt if you read my last blog). So, this strategy helps you save interest over the length of time it takes to pay off all your debts.


The advantage of the snowball is that, by human nature, we tend not to stick with things over a long period of time. The advantage of the snowball is that when you are really starting to attack your debt, some small debts, regardless of interest rate, when knocked out fast, give you a quick taste of how this works and help with the motivation and commitment it takes to get out of a pile of debt that could take an average of 17–18 months, thus playing into how our brains work.


As you might guess, it is possible that the payoff rank and interest rates align perfectly, so that it doesn’t matter which approach you take, since the ranking is the exact same. This is a win-win situation as you get the advantages of both methods. In my coaching practice, most clients are best served by the debt snowball since the reason for coaching is their need to get started and stay motivated.


Let’s not lose sight of the most critical thing in either of these approaches: THE EXTRA PAYMENT.


As bulleted earlier, the two best ways to create the extra payment are: more income (bonus, overtime, side hustles, selling stuff, etc.) and living on a budget (cutting expenses, negotiating bills down, etc.).


Remember, that because no two situations are the same, a financial coach may assist you at any point along the way, from the beginning to the end of your debt-free journey, and post debt-free life planning.



 

Appendix


Debt Avalanche Example (illustration)

First, sort the example debts using the Debt Avalanche, from highest to lowest interest rate.

Once the first debt is paid off, it rolls off the list and you avalanche what you were paying into the next debt.

Continue until all debts are paid.


Debt Snowball Example (illustration)

First, sort the example debts using the Debt Avalanche, from lowest to highest payoff.

Once the first debt is paid off, it rolls off the list and you avalanche what you were paying into the next debt.

Continue until all debts are paid.






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