There are many ways to pay off your debt, but most people choose option one and let it ride. Why? Because paying down debt is not an exciting use of your money. We don’t want to deal with past financial decisions, we want to live in the moment and therefore we believe that we can only afford to make the minimum payments. This results in payments over your lifetime for things you don’t have, don’t use, and don’t even remember buying. Choose another option.
There are several ways to approach your debt.
Option One: Snow job – (my made-up term!) make only the minimum payments each month and let it ride…with the pipe dream that one day you will be debt free.
Option Two: Snowball – list your debts smallest to largest, make the minimum payment on all but throw every extra dollar you can find on the smallest debt. When the smallest is paid off, take that full payment plus the extra and put it on the next smallest debt.
Option Three: Avalanche – list your debts by interest rate, largest to smallest. Tackle the largest interest rate payments first. Make the minimum payment on all debt, but throw every extra dollar you can find on the debt with the largest interest rate. When the largest interest debt is paid off, take that full payment plus the extra and put it on the next largest interest debt.
Option Four: Blizzard – a hybrid method of both the Snowball and Avalanche methods. Start with the Snowball method and knock out some of your small debts, then shift to the Avalanche, to attack the higher debt options.
Many financial guru’s choose the Snowball method because it helps you knock out some of the smaller debts and gives you momentum to keep going. You see that you have fewer bills coming in and that you are making progress. This is the go-to method and it works. It is especially satisfying if you have a lot of small debts. You see real progress, when you are able to find extra dollars and throw it all at the smallest debts to get them off your plate. A side-hustle, selling on ebay/craigslist, refund checks, birthday money – any extra dollars you can find gets thrown at the debt.
I recently read a new book, Money Hacks, by Lisa Rowan, that is a quick read of 275+ ways to decrease spending, increase savings, and make your money work for you. Tip number 115 is to “Kickstart with a Blizzard”. I love this concept of merging the Snowball and Avalanche methods. Rowan suggests you start with the Snowball method to free up some cash to put towards other balances and then shift to the Avalanche and focus on your debt interest rates, paying down from highest to lowest. She further says you can go back and forth between the methods as needed. If you see one of your debts getting closer to zero, go back and hit it with the Snowball method and then switch back to the Avalanche.
For example, utilizing the Blizzard method in the debt example below, start by using the Snowball option, making minimum payments on everything but the personal loan of $2,000. On this payment instead of the $65, pay every dollar extra you can on this debt. When it is paid off, switch to the Avalanche and throw all the money you were paying on the personal loan plus any extra you can find to the credit card balance with the 18% interest rate, while paying the minimum on everything else. As this is paid off, go back and pay off the Student Loan 2 and then move on to the vehicle one loan balance. Remember also that while you are attacking your debt, do not incur any additional debt. Your goal is to be debt free.
Once your non-mortgage debt is paid off, you can decide if you want to speed up your mortgage by making extra payments. My goal is to pay off my mortgage early and so I am making an extra payment of a few hundred dollars each month towards the monthly payment. Even though my interest is low, I have a personal goal to pay off my mortgage and free up those dollars for other areas like travel, investing, retirement and college planning.
I’ve never met anyone who gets satisfaction out of having debt. Choose one: the Snowball, Avalanche or Blizzard method, and get going on your plan. Make a plan, follow through and then celebrate at the finish line. Whether it is one year or ten years, it will be worth it!