Debt Repayment: How Do We Do It?

As many of us look over our financial picture, we find that we’ve allowed some bad debt to creep into the frame.

And, before we get too far into this post, this isn’t going to just be another avalanche (focus on highest interest rate first) vs snowball (focus on smallest balance first) post.

My path to paying off my bad debts didn’t follow either method exactly. I also allowed some distractions in my life that slowed down my progress (I think everyone probably does, at some point).

Even though I didn’t follow either the snowball or the avalanche method perfectly throughout, maybe some of the things that worked for me will help some of you work through developing a plan that works for you.

So, where do we start?

Regardless of how you decide to attack your debts, I think your plan should have a basis in either the avalanche or the snowball. My plan had it’s roots more in the avalanche method than the snowball, with a few opportunistic variations here and there.

The avalanche method is designed to pay down debts faster than the snowball. Because you’re attacking the highest interest rate, those interest expenses are reduced more efficiently and the debt is gone in less time. In terms of getting an early win, you will focus on reducing your debt below a certain threshold (total debt balance below $25,000, for instance), or doing the same for your interest charges (such as, “I reduced my interest charges on my credit cards to less than $250 this month.”)

The snowball, on the other hand is designed to reduce the number of debts you have early to give yourself an early win by getting rid of a single debt payment as quickly as possible. From there you move on to the next smallest debt amount.

My theory is that the more you like math, the more the avalanche method will appeal to you. If you’d just as soon not worry about the math as much, you might want to give the snowball a try.

Just remember that, whichever method you start with doesn’t mean you can’t switch to the other if you think it will suit you better.

Putting the plan into action…

A hypothetical debt summary
Figure DS shows a hypothetical summary of debts.

Figure DS is an example debt summary for someone at some point in time. Since we haven’t decided on the debt snowball or avalanche method, yet, the debts are listed in no particular order.

Now, we look at how we would prioritize paying down debts under each repayment method.

Figure SB1 shows how we would prioritize these debts under the Snowball method.
Figure AV1 shows how we would prioritize these debts under the Avalanche method.

Note the different order we’ve placed the debts in for each of the methods above.

The minimum payment is also the same at this point for each method, and I rounded the weird minimum payments up to make things easier for my brain to remember them.

When I was paying on my debts, I tended them relentlessly each month, adjusting my payment amounts as I went. But, I think it’s OK if you want to leave your payments the same for 6 months or so, if that fits more with your personality.

Leaving payments the same for 6 months is also the basis for these next couple of charts. In the example above, I didn’t assume any additional cash to pay debt in our plan. But, note where to add any additional funds to debt repayment in each example.

Figure SB2 shows how the snowball changes after 6 months of paying $990/month on these debts.
Figure SB2 shows how the avalanche changes after 6 months of paying $990/month on these debts.

If we leave our payments the same for 6 months, we’ll have the remaining debt balances above. Note where our total payments stay at $990 per month while the minimum payments drop by $9. We use this to shift our payment to our top priority.

For the debt snowball, we get to shift $10 up to Credit Card 2 (smallest debt), while there is a $5 shift to Credit Card 3 (highest interest). We’re not shifting $9 because I like to round the numbers.

Also, note that the Snowball shifts $10 while the Avalanche only shifts $5. This is also a quirk from our rounding; this will even out over time.

Now that we’ve looked at how we shift payments from one debt to another as we continue paying down our debts, let’s look at a couple of windfall scenarios.

Figure SB3 shows how a $2500 windfall impacts our balances in the debt snowball.
Figure AV3.1 shows how a $2500 windfall impacts our balances in the debt avalanche.

Say you get a tax refund or bonus at work of around $2500. How do handle that in each scenario? The tables above show what happens when we simply stay the course, paying on our top priorities until we run out of our windfall money.

Under the snowball, we now have only 4 debts left compared to still having all 5 for the avalanche method. Our minimum monthly payment has dropped to $927 for the snowball and $928 for avalanche. We still pay the same $990 each month regardless of our approach.

Note that we have another option on the avalanche method, though.

Figure AV3.2: We can temporarily switch to the debt snowball if we choose to.

In figure AV3.2, we temporarily switch from avalanche to snowball, so we can eliminate a debt from our list. The minimum payment is still $928, we’re still paying $990 every month, but we have one fewer debt in our list (just like in the snowball method).

In the long term, sticking with avalanche (Figure AV3.1) costs us less, but if paying off a debt works for your psychology, a temporary switch to snowball can pay pay some dividends if it helps you stay motivated.

Now, what if our windfall is a little larger?


Figure SB4…rather than paying our lowest debts in order, scrape an extra $50 together and pay off the car, which is a secured debt rather than unsecured like our credit cards.
Figure AV4…pay off the secured debts when you can just like we did in the snowball.

Whether your leaning toward the snowball or the avalanche, if you ever have enough money available to pay off a secured debt (where the debt is tied to something you own), I think you should do it. In our example, that secured debt is a car payment; mortgages are also secured debts.

Another aspect of this is that, unlike credit cards, installment loans like our car and student loans have the same payment every month regardless of your balance. There is no reduction in the minimum payments each month. With this large of a windfall, we have an opportunity to help our cash flow out a little more.

Even with our car payment out of the way, we’re still going to plan on paying the same $990 every month that we started with. But, in the event of an emergency, we would have an additional $350 to divert to that emergency until we move past it.

I hope that walking through some of my thought processes I had as I was paying my own debts down helps you in your financial journey.

Thank you for visiting Finunciate. Come back soon.

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