Many Americans hold several forms of personal debt. The majority of your friends are in debt, according to the statistics. You probably would be hard up to find someone close to you who doesn’t have a mortgage or student loan payment due each month. Plus many other, more ancillary types of debt.
It can be hard to see the light at the end of the debt tunnel. Unexpected expenses occur, family vacations get planned… all of these are like small cave-ins in your tunnel to freedom. It can become hard to figure out a plan to get yourself out of debt.
However, the best way to get out of debt is with a plan! There are so many plans and methods floating around the internet that you may have come across, but none are more popular than the debt snowball and debt avalanche methods.
Although these methods take you through similar processes, they have very different end results. In order to pick the method right for you, you must take a good, hard look at your outstanding debts. Know everything you can about them: the lender, the interest rate, the amount owed as of today, how much you have to pay each month, etc. Then, and only then, can you decide which method of becoming debt free is right for you. Hopefully, after laying all of your debt information out on the table, you will be able to organize your debt and see a clearer path to freedom. And freedom and happiness is our goal, of course.
Let’s unwrap the debt snowball:
The debt snowball is probably the more popular of the two terms. Authors like Dave Ramsey advocate for this method, claiming that it is the better option for those who have been beaten down by the debt payoff attempts in the past.
In order to use the snowball method, you must list out your debts based on name (or lender), total amount that is owed, interest rate on the loan, and the amount due each month. Put each category at the top of a column in Excel or a piece of blank paper, but don’t write the debt information down yet. Also add a column for “new payment,” which we will talk about a little later.
Next, look through each of your loans. You want to pick the loan that has the smallest total amount due. This does not mean the smallest monthly payment, but the smallest amount due as a whole for that one loan. This loan will go at the top of your snowball list.
Find the next smallest loan and place it on your snowball list. Continue until all of your loans have been ordered from smallest loan amount to largest. Make sure all of your other information on your loans is added to their correct column.
Now is when the “new payment” column comes into play. Once you figure out how much extra you are willing to pay above and beyond your monthly debt minimum payments, add that amount only to the first loan. Pay the minimum on all other loans. Soon, your first loan will be paid off, giving you pride in a $0 balance! After this happens, apply the amount you were spending towards loan #1 (the minimum monthly payment and extra money together) and aim it toward loan #2 on your list. This will mean you will be paying what originally was:
Loan #1’s minimum payment + Extra amount dedicated to paying off debt + Loan #2’s minimum
Continue on this path until you are debt free! While this method may take a little longer than the debt avalanche method and may cost you a little more in interest along the way, this is a great method for people who want to keep motivated on their journey to freedom.