When you’ve racked up debt across multiple loans, being debt-free seems like a distant dream. But it’s possible! The first step is to create a repayment plan that will work for you. There are many ways to get out of debt, but the two most popular methods are the debt snowball and the debt avalanche. Both plans involve aggressively paying down one balance while making the minimum payments on the rest. The difference lies in what order you tackle the debts. Let’s dig into the differences to see what plan would work best for you.
The Debt Snowball
With the debt snowball, you pay off your debt from the smallest to the largest balance. Financial radio show host Dave Ramsey has advocated this method for years. Let’s say you have the following debts:
- Credit Card 1: $500 at 3.9% ($25 minimum payment)
- Credit Card 2: $1,000 at 8% ($50 minimum payment)
- Credit Card 3: $3,000 at 21.99% ($100 minimum payment)
- Credit Card 4: $12,000 at 18.9% ($200 minimum payment)
Let’s say you cut your expenses and freed up $300 each month in your budget. By allocating this money entirely towards the lowest balance, you pay off your first loan in less than two months! Then, put the minimum payment from that debt once it’s eliminated ($25) and the money you freed up in your budget ($300) together. Your debt snowball is now $25 larger. You can now put $325 per month towards that second debt (in addition to the $50 minimum payment you’re already making) for a total of $375 until it too is eliminated in just over a few months. And so the debt snowball grows until all the debt is paid.
The Benefits of the Debt Snowball
With the debt snowball, the focus is on motivating good habits. By concentrating on the smallest balances, you get a small win right at the beginning of the journey. It’s wonderful to pay off a credit card and know you no longer have that monthly payment. That quick succession of small wins helps you to stay the course and dump all your debt.
The Shortcomings of Debt Snowball
Since the debt snowball focuses on balances instead of interest rates, it’s entirely possible you won’t tackle the largest interest rate card right away. This means you will pay more in interest with the debt snowball than with the debt avalanche. It also means it might take a few more months to get out of debt. If you can’t stand the thought of paying extra interest, the debt avalanche might work better for you.
The Debt Avalanche
With the debt avalanche, you pay the debts down from highest interest rate to lowest interest rate. Compare this to the debt snowball method above. Here’s what that list of debts looks like, in the order you’ll pay them off, if you’re using the debt avalanche method:
- Credit Card 1: $3,000 at 21.99% ($100 payment)
- Credit Card 2: $12,000 at 18.9% ($200 payment)
- Credit Card 3: $1,000 at 8% ($50 payment)
- Credit Card 4: $500 at 3.9% ($25 payment)
If you apply the same extra $300 to your debts every month, you’d send it to the $3,000 loan with the 21.99% interest rate first. Since the balance is larger, it takes eight months instead of two to pay off the first card completely. But over time, you’ll pay less towards your debt because you eliminate the most costly interest rates immediately. The math often makes much more sense with the debt avalanche, but it does take more discipline because it takes longer to see big results.
The Benefits of the Debt Avalanche
Again, with the debt avalanche method you pay less in interest. If you have a large debt with a high interest rate, this strategy can save a substantial sum in interest. Also, if you have two loans that are just about the same balance, you might as well tackle the higher interest rate first to save some money.
The Shortcomings of the Debt Avalanche
With the debt avalanche, it often takes a bit longer to pay off the first debt. In the example above, it takes six additional months to eliminate a payment. And the second credit card takes a total of 24 months including the six months of minimum payments before you get the extra amount rolled in from paying off card one. If the long slog is discouraging, the debt snowball might help you stay motivated to complete the journey.
Tackle Your Debt
Consider your own personality and your own debt situation to determine the best method for tackling your debt. Even though the debt avalanche is less expensive, it’s more important to take consistent action over time so you can reach debt freedom. Remember, you can always use a bit of both methods. If you are motivated after tackling the smallest balance, you can switch to paying the higher interest rate card. Then switch back to the lowest balance if you find yourself losing motivation. Regardless of the debt repayment method you choose, there are other strategies for paying down the balance. Consider making biweekly payments instead of monthly payments. You’ll add in two extra payments this way. You can also look into a balance transfer. You might be eligible for a lower interest card if you’ve been paying down your debt consistently. Just make sure you don’t add any more to the new card! Debt freedom is possible. Begin by committing to a repayment plan today and use one of these payoff methods to help you.
Recently engaged or married? After all the excitement and honeymoon bliss has faded, you might be left wondering how to manage your finances as a couple. Concerns over how to work together to deal with your newly joined lives might be heightened if you have more than just bills to pay and savings to build. When it comes to newlyweds and money, figuring out how to deal with debt when one or both individuals brings it into the marriage is an important step.
Joint or Separate Finances?
The first thing you need to figure out with your other half is whether or not to combine your finances. If you already have a working plan in place, great! Skip ahead to the next piece of advice. Ultimately, this is a personal decision, and one that every couple has to make for themselves.
What’s Mine Is Yours…Wait, Does That Apply to Debt?
You now need to decide exactly how you’ll pay off your debts. Again, every couple has to make this decision for themselves. It could depend on who has debt and how much. If both of you brought debt to the table, you can either tackle all the debts together or focus on it individually. If one of you holds debt but the other doesn’t, this may be a topic to discuss before the wedding. You might choose to support your future spouse and help them pay their debt – or you may agree that the individual with the debt holds the responsibility to repay it. Whether you work together financially or choose to keep money separate, you should always be supportive and encouraging of each other. “Helping out” isn’t limited to providing money. You can share ideas and knowledge to create a better repayment plan. One of you can research to find programs and tools to help make money management easier. Or you can even do a few more chores around the house when your spouse is out doing some part-time work on the side to earn more money to repay that debt even faster. Remember, this is a partnership and everyone can contribute – even if those contributions don’t look exactly the same.
Communication Is Key
When deciding how you’ll deal with debt, keep in mind that no one should feel resentful or neglected. It’s important to set up regular money dates to go over your finances together and allow both individuals to voice concerns as well as to celebrate little victories. You should discuss money with each other to ensure you’re on the same financial page. To start, set up your date to discuss the overall state of your finances. You’ll also want to create a plan on how to pay down your debt. If you need help getting started, use these ideas to get your first money date going. You can:
- Discuss the nitty gritty of your debts (and everything relating to them: interest rates, minimum payments, balances remaining), bank balances, and investments.
- Track your spending together. Even if you have separate bank accounts, you should both track your individual and joint expenses. If you’ve never done this before, it might help to backtrack a bit and reference prior statements to see where your money has been going.
- Create a budget, with input from both parties. This will help keep your spending on track, possibly allowing for extra payments toward debt.
- Mention and discuss the financial goals you both have (buying a home, establishing an emergency fund, saving for a family).
- Establish a plan to reach your goals – including paying off your debt. List out action steps that you’ll take to achieve financial success. This might include boosting your income (by picking up a side gig, working overtime, or earning a raise) and cutting expenses (by eliminating unnecessary costs, living beneath your means, and looking for frugal alternatives to expensive purchases).
After this initial meeting, make sure you check in with each other regularly to see what kind of progress you’re making. That might mean once per week or once per month – depending on what your “team” feels comfortable with. It’s okay if you don’t stick to an original goal or if your priorities shift, but you must communicate that with your partner. Regular money dates help create a good time to share all this and stay on the same page.
Prioritize Your Debt
If you have multiple debts, they may feel completely overwhelming. Before you panic, know that you and your partner can do this! And there are a few strategies you can use to help make it easier. The first strategy is known as the avalanche method. This method directs you to prioritize your debts by their interest rates. You work to pay off the debt with the highest interest rate first (while still paying the minimums on your other debts). Mathmatically, this makes the most sense. The interest rates on loans and credit cards cost you more the longer you hold on to them, and of course higher rates cost you the most. But some people find it really intimidating to try and tackle their biggest, baddest debt as the first step toward debt freedom. If you prefer to start small, you can try a different strategy that comes at the problem from the other end. This strategy, known as the snowball method, involves prioritizing debts in order of the amount of money you owe. You start with the debt with the smallest balance and work your way up, regardless of interest rate. This is helpful for those that feel discouraged by the amount of debt they’re in, as it should give them a quick win. However, it may not be the most financially efficient way to deal with all of your debt. You may end up paying more in the long run if you let high interest rate debts sit on the back burner while repaying other balances. What matters is that you’re making progress with your debt and moving in the right direction. It’s best to just start. If there’s one debt really weighing on you emotionally, tackle that first!
Don’t Give Up
Lastly, focus on the fact you both want to get out of debt. While things might get tough, remember that you’re both working toward the same thing. Be supportive of each other, even when mistakes happen. Be thankful you have someone to share the journey with. When all is said and done, you’ll have a stronger relationship.
Need Some Extra Guidance?
Check out the Newlywed Money Bootcamp to see if it’s right for you!
Often in personal finance, we talk about the things you should start doing, without giving consideration to the things you need to stop doing in order to get started on the healthy habits. These bad habits are the ones that unbeknownst to you could be getting you into financial trouble (or off course) to begin with. So read on for 4 bad money habits you should kick to the curb stat.
Note: If you need help holding yourself accountable with new habits you’re trying to form or those you’re trying to break, check out Lift.do, an awesome app and website that makes breaking habits and forming new ones fun and interactive.
1) Throwing down your credit card for impulse purchases. A lot of us (myself included) use our credit cards to pay for things in order to earn points with the intention of paying off the balance at the end of the month. This is great in theory, but where people get into trouble is using the credit card without – you guessed it – tracking. If you’re going through the month using your credit card for dining out, gas, entertainment, clothes and more with the intent of paying it off in full or even just throwing extra towards the balance, this can get you into trouble. Not only are you unaware of where your money is actually going, but without some sort of structure or dollar limit to stay within, you’re likely puling money away from funding other goals that are more important to you. Set a max dollar amount that you can use your credit card for each week or month and ensure you have the funds to pay it off from your bank account (without pulling from other savings goals).
2) Paying the minimum towards your consumer debt. While we’re on the topic of debt, many times I see people paying just the minimum amounts due on their debt or putting a little extra towards each payment. While it’s great that you have the habit of paying your bills on time, paying the minimum is going to feel like it’s a never-ending hole to climb yourself out of (not to mention – it’s likely going to cost you way more in interest). Make it a habit to target the highest interest rate balance first and throw any and all extra money towards that payment each month. The highest interest rate is typically the one that is costing you the most and therefore the balance you want to wipe out the fastest. From there, target the next highest interest rate and so on.
3) Not putting money aside for emergencies and / or retirement. If you don’t have an emergency fund set up, now is the time to start. If something did go wrong and you found yourself hit with a medical bill, car repair or more – it could wreck havoc on your financial life. In addition, though it seems a way off – retirement will likely come, and even if it does look different then the type of retirement your parents are envisioning for themselves, you’ll still want to have a cushion that will help to support you and your dreams. The best way to break this habit is to begin savings in small amounts on a systematic and automatic basis. That means automatically transferring money into a savings account during each pay period or each month and “setting and forgetting” it. This will get you into the habit of paying yourself first.
4) Ignoring your employee benefits. Employee benefits booklets are not the most riveting read around, however, they’re full of useful information to help you lead a more financially savvy life! It’s important to understand the health insurance options available to you along with disability and / or life insurance coverages. If your employer is providing the option for you to participate in some of these programs and you’re choosing not to take advantage, that’s essentially saying no to someone offering you a parachute before you jump out of a plane. It’s protection. They’re offering it. Take advantage. In addition, flexible spending accounts and employee stock purchase programs are important to evaluate. Also, if there’s a 401(k) match available through your employer, ensure you’re contributing at least enough to take advantage of the full match (it’s free money!). Habits can be both easy and hard to form or break. That’s what makes them difficult to hold onto at times. Remember to start small, choose one thing at a time to tackle and celebrate wins along the way. Want more information on taking control of your financial life? Get on the Workable Wealth Insider List for instant access to 9 Steps to Workable Wealth, a guide to getting in your best financial shape yet!