Looking at paying down debt

If you search or ask how to pay down debt the fastest, You’ll probably hear about 2 methods; Snowball & Avalanche. Both sides have their highly devoted fans. I personally prefer the Avalanche, but understand the mental benefits of the Snowball. I have a few friends that think I’m insane for not believing in the snowball. I’ll lay out my current debt (as of 1/17/20) to see what works out the best. Now down to our 2 contenders…

Snowball is the idea that you pay the minimum payments on all of your debts, and any extra money you have would go towards the smallest balance. As you pay off debts, the extra amount is a snowball on a steep hill and eventually will be able to pay off the bigger debts quicker.

Pros

  • Helps you mentally feel better about paying off debts which in turn encourages paying off debt faster.
  • Gets rid of the pesky little debts asap

Cons

  • Pays zero attention to interest rates

Avalanche is the idea of paying off the highest interest rate debts first. As with the Snowball, you pay all of the minimum payments and the extra goes to the highest interest rate. In theory, this would save you in the long run.

Pros

  • Could potentially save you money
  • Works with almost any mix of debts

Cons

  • Harder to stay committed if your highest interest debt is a large balance.
  • No short term satisfaction from paying off debts. Longer play

The numbers tell us that the Avalanche is the better method, but numbers also don’t have any emotion in them. The reason I say this, is because one of my friends, who is a strong believer of Snowball, said that because they paid off the small credit cards and personal loans, early on, they saw places they could be spending less. The morale boost they got from paying of the first and second debt caused them to rethink their spending and put that money to more use paying off other debts much faster. However a lot of their interest rates were 9% or more and close to each other.

For me, personally, I kinda started with both. I financed my wife’s engagement ring and when I finally sat down and looked at my money situation, the highest interest and smallest balance was the ring. Once I knew how much extra I could afford each month, I paid off the ring and now I no longer have a 28.99% loan at an $85/month payment. That extra $85/month is now getting funneled to my highest interest debt which annoyingly sits at 23.99% at a balance of just under $10,000. From this point on I’ll be sticking with the Avalanche.

What might help you decide which method is the best for you, make a list (I prefer spreadsheets) of what all of your debts are and include balances and interest rates. I tried making my own spreadsheet with calculations to see how my plan was going to work, but I got lazy and found this one from Vertex42. They have a free version of the spreadsheet, but is limited to 10 debts. If you have more than 10 they have a paid version that is $9.95 for 40 debts (20 on google sheets). I was able to use the free one for my situation. This worksheet allows you to see how much you’ll spend on interest if you do Snowball, Avalanche, or you can even give your debts an order that you want them paid off in. You are also able to say how much extra you are going to throw at your debt per month including (on the second page) putting additional payments at certain months. If you know how much on average you get as a bonus, holiday pay, or a tax refund, you can throw that in there as well to see how much that will help save you by the end.

I’ll lay out my debts and show the numbers of what snowball and avalanche would do for me.

DebtBalanceAPRPayment
Credit Card 1$9,937.0023.99%$305.00
Credit Card 2$2,205.5012.25%$60
Student Loan 1$2,213.274.50%$50.00
Student Loan 2$3520.263.86%$56.33
Student Loan 3$2,801.463.40%$45.00
Student Loan 4$2,849.453.40%$44.24
Auto Loan$3904.422.74%$242.95
My current debt as of 1/17/20

With this information entered, I also added what my average Holiday Bonus, tax refund, and other Holiday pay in the appropriate months. My total payments are $803.52 per month. At this point, I can afford to throw $1,200 per month at my debt. So my initial snowball is $396.48. If I were to select Snowball as my strategy, I would spend $3,923.57 in interest and I would be debt free in December 2021 with my first debt being paid off in April 2020 (4 months away). If I do the Avalanche, I would spend $2,268.61 in interest, be debt free by October 2021, and my first debt would be paid off in January 2021. (If I played by the actual numbers, I would still have 1 payment of $50.63 on one of my student loans, but when I am that close, I might as well get rid of it. So I’m saying October for the Avalanche.)

Looking at the data, avalanche would save me $1,654.96 in interest and get me out of debt 2 months sooner.  If you add on the fact that the $1,200 per month I am putting towards debt would be able to be saved for the 2 month gap between the end of the Avalanche and the end of the Snowball, I would have $2,400 plus the $1,654.96. The only thing that I don’t have included here is that I am putting all of the cash back on both credit cards to work on the debt. So far I have been averaging about $25/month of cash back rewards that I have funneled back into paying down my debt. And as I pay back more as the balances and financing charges dwindle down, the cash back will increase giving me the little bit of extra help. I’m also okay with doing avalanche because my student loans are some of the last things to get paid off. And not to get political, because I can’t stand politics, if certain people get elected and forgive student loans, they probably won’t care how much you’ve already paid, they’ll just give you a check for the current amount or how much they decide to give to you. Plus most of those interest rates are at or below average inflation so I am not really losing tons of money to interest. 

Emotionally, Avalanche is a long haul, because even though you see those numbers going down, there isn’t the joy of seeing a loan going away. It is kind of like trying to get in shape or lose weight. You can’t see immediate results, but as I look at the second page on my spreadsheet, Once January 2021 hits, I’ll be getting rid of a loan every 2 months. I know this next year of trying to be militant on paying my debt down will be hard. I’ll make mistakes and buy into something stupid or splurge on junk or have an emergency, but as per usual, I realize my mistake quickly and work harder to make up for the lost time and money. Who knows, maybe I’ll have some long lost relative that I never knew, give me their fortune and I won’t have to worry about Snowball and Avalanche. I’ll keep you posted on any rich relative windfall I come into.

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