Snowballs and Avalanches

The best debt hack in the world.

Many of us have been raised to believe are two types of debt in this world. Good debt and bad debt. The truth is there is no such thing as good debt. Owing money is owing money, it's just the interest rates that stipulates if debt needs to be paid off faster than other outstanding debt.

Why do I say this?

In reality life doesn't always work out as planned and when something unexpected happens we need to be prepared for these moments. 

Imagine you've just lost your job, but, you had no bad debt and you have paid off your mortgage because any additional money you received went straight onto the mortgage.There won't be any stress of eviction or worrying about having to get another job as quick as possible or the salary you will receive. 

I use mortgage as an example because the amounts are usually quite substantial, but it can be for literally any outstanding debt, car loans, home loans, credit cards, personal loans, etc.

Having no debt, as in zero debt, is a life changing moment. You can literally just work a couple hours a week if you wish. You can get into a job you love or spend time doing something you are passionate about that doesn't pay because you only need to earn enough to buy food, cover bills and plan for your holidays.

Before doing this I highly recommend writing a list of all your outstanding debt from the $30 you owe Steve to the amount you have outstanding on your mortgage.

So how does the avalanche and snowball help you?

Using one of these methods helps you achieve your goal of paying off your debt quicker than just throwing money at whichever statement you receive first.

The Snowball Method 

This method is based on paying the smallest debts and building on that.

So if let's say you have 5 different types of debt ranging from $500 to $600,000 you will pay the minimum amounts on all your outstanding debt (because it's a legal requirement) but any additional money you have every payday will be put straight onto the smallest amount of outstanding debt. 

Once the $500 amount has been paid off you will use the minimum payment amount you were paying for this debt, as well as the additional payment amounts to then put onto your next smallest debt amount. As you continue to pay off the smallest debt amounts you are increasing the payment amounts you are making.

Just be mindful of checking terms and conditions as some companies charge a fee for each additional payment in which case you can put the money in a high interest account until you have enough to pay off that debt as a lump sum. 

This method is great for psychological reasons in that there is a sense of accomplishment once you can cross another debt off your list, effectively giving you cause for a little celebration each time you do.

The Avalanche Method 

This method is good in the sense that if you are unable to negotiate a better interest rate with your loan providers (which I highly recommend you do) then this method is the most cost saving method to use. 

Here you look at paying off the debt with the highest interest rates, meaning if you have let's say a $30,000 credit card and the interest rate is 19%, you put every extra dollar onto this card to pay it off as quickly as possible. Once this card has been paid off your then move onto the next highest interest rate loan and it effectively becomes an avalanche because once you get to the debt with smallest interest rates you will have saved yourself potentially thousands in interest which you would have otherwise been paying.

Let me know in the comments if these methods help you ❤️

Posted 04 April 2020

Share

site powered by Nimbo