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This post is all about how to pay off debt during your debt free journey.
In order to pay off debt, you must be as strategic as possible. You have to have a system in place that works for you, and shows how much success you are achieving by paying off your debt every step of the way.
There are two methods that are quite different that can help you set goals, remain consistent in your debt free journey and achieve financial successes: the debt snowball and debt avalanche methods.
Even though there are many ways to deal with debt and pay it off, these two methods have proven to work well.
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Which Method Is Better: Debt Snowball Or Avalanche Method?
When you finally decide to pay off your debt, you will come across a few methods that are available to pay down debt smart and fast.
Paying off debt requires you to be consistent and dedicated and it can be hard sometimes. Who am I kidding? It can be hard a lot of time! You may lose your drive on several occasions when things seem hopeless but you have to remain constistent and dedicated to paying off debt, no matter what! You have to go all in because you’ve made the decision to better your life.
You may have to make many, many sacrifices, do things you have never done before: missing out on “important” events, reducing your expenses drastically, getting an additional job to increase your income. You might have to do things that are quite uncomfortable like saying no a lot! Paying off debt and being dedicated is really a learning curve.
If you know about Dave Ramsey, the financial guru, who’s been helping individuals get out of debt for decades, then you might have heard about the debt snowball or debt avalanche method. For Dave Ramsey and many financial gurus, paying off debt, especially debt in terms of loans and credit cards are essential in gaining more financial freedom.
The debt snowball or debt avalanche methods are two different ways how you can pay off debt.
What Is The Debt Snowball Method?
The debt snowball method is used to help individuals to pay off debt fast and achieving small successes by going after the smallest to largest debt.
By making small payments and knocking out each debt fast, you are able to celebrate small successes. In order to go ahead with the debt snowball method, you have to list all of your debts in order from small to large. You want to make at least the minimum payments to each lender.
Start focusing on your smallest debt from one of your credit cards. If you have additional money left over after you have made all minimum payments towards your other loans, you may throw additional money at your credit cards to get that balance down quick.
In the debt snowball method, less focus is put on interest rates. Instead the focus is put on cancelling out one debt after another and through small wins you gain momentum as well the motivation to continue with your next loan.
What Are The Benefits Of Using The Debt Snowball Method?
Psychologically the debt snowball method gives you the motivation to continue paying off debt and wiping out one loan after another. As you pay off your loans from smallest to largest, eliminating one loan after another provides you with milestones and wins.You quickly see how your efforts are paying off.
These milestones allow you to gain momentum and celebrate your accomplishments. Especially if you have a lot of smaller loans, this method can be used to successfully and very swiftly pay off your debts. But if you have larger loans with high interest, then this method is keeping you back.
What Are The Consequences Of Using The Debt Snowball Method?
Financially, the debt dnowball method does not consider the risk of interest on long term loans.
Not considering interest of a loan and its terms can lead to more of your hardearned money spent on the loan over its span than is absolutely necessary. Not considering total interest calculation of a loan over a long period will lead to you spending more money as opposed to saving the money for other things such as emergency savings or toward a down payment of a house.
Total interest consideration over the period of a loan is crucial to understanding where your money is “wasted” or could be otherwise used to your advantage.
What Is The Debt Avalanche Method?
The debt avalanche method focuses on interest which is why you would list your debts in the order of highest to lowest interest rates.
The debt avalanche method is another method you can consider using when paying off your debt. In this method, you want to wipe out your loans with the highest interest rates first, while continuing to making minimum payments to all other loans.
Any extra cash that you acquire should be thrown to eliminate your toxic debt first (credit cards, then car loans, student loans, etc.) always considering the highest interest rates of said loans.
What Are The Benefits Of Using The Debt Avalanche Method?
The benefit of using the debt avalanche method is that you save money on interest and get to save that money in the long run for yourself!
So this method makes more sense financially. When using the debt avalanche method, you are not only saving money on interest for yourself but you are gaining financial literacy along the way.
Once you have understood how “interest” can work in your favour rather than against you when you borrow money, you have figured out one of the most tricky parts in finance. You will have a better understanding of the cost of interest and in future, would likely look at the bigger picture before taking on a loan of any sort.
What Are The Consequences Of Using The Debt Avalanche Method?
If you are sitting in front of a big amount of debt, then the debt avalanche method can be quite the long journey without “momentum” really. You might just be standing in front of that large amount od debt and not really seeing any wins.
Even though it’s a win when you pay off just $10.00 of your loan in my books.
Another point is that you might lose your motivation along your debt-free journey by using the debt avalanche method.
What You Can Do To Keep Yourself Motivated When Using The Debt Avalanche Method?
In order to keep yourself motivated when using the debt avalanche method, you could for instance set yourself small milestones to pay down a high amount with high interest. It then would feel like small accomplishments for yourself. You need small milestones in order to keep yourself motivated. For example, every time you pay off $2000.00, you allow yourself a small reward. Just keep it to a minimum and don’t go overboard! 😆
I have also found that debt free charts are super helpful. Each time I came one step closer to being debt free, I would colour in the sections. It’s what kept me going all the way and not stopping.
Final Note:
Whichever method you choose to pay off your debt, there is no right or wrong when it comes to personal choosing. But there is a right financially speaking and that is using the debt avalanche method to pay off your debts as it will save you more money in the long run.
When I paid of 10,000 dollars in credit card debt spread out across three credit cards, I did not use the Avalanche method. I used the Snowball method and hitting one credit card after another while I also continued to make minimum payments on all other cards helped me pay off my debts in a matter of 10 months.
If I had loans to pay off today, I would probably look at the interest rates of each loan and use the debt avalanche method. Mathematically, it just makes more sense and why would I want to accumulate more debt over time by paying the bank more interest? The bank should pay me interest!
“Interest” is something I learned a lot about after I had successfully paid off my debts. You never want to delay paying off interest as it can lead to a lot of money spent extra on your loans.This money could be used more effciently for yourself otherwise.
Either way though, the most important factor is that you realize that is is essential to pay off your debt as consistently and dedicated as possible. There is no other way to financial freedom than paying off debt first and it’s a non-negotiable. The end goal is always the same: debt freedom!
This post is all about how to pay off debt during your debt free journey.