Have you heard about the debt avalanche method for getting rid of debt? You may have heard of the debt snowball method. Dave Ramsey is a big proponent of the debt snowball method. Many other people support him as well. I on the other disagree and believe the Debt Avalanche is the best method.
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Oh debt, why is it a pain?
Debt is something that people cringe about. It is that financial black spot on your perfect life, and it is oftentimes very hard to get rid of.
As a student at University, I collected plenty of Student loan debt. Unbeknownst to me, I would have to spend the next 9-10 years of life trying to get rid of this financial hurdle. It didn’t seem so bad, it just cost me about $300 every month.
Lets use math and see how compounding interest would grow this amount if I invested that $300 per month at 7% annually instead of having debt. After 10 years since gratuating, if that debt payment was invested, it would be worth $53,220 at age 32. That is simply investing the $300 debt payment at 7%. If I stopped that payment and let it grow for the next 30 years, it would be worth around $405,000.
Debt really killed some financial momentum of mine, and I am here to try to stop it slowing down other people’s financial momentum.
Two Methods Debt Snowball vs Debt Avalanche
There are two methods to get rid of debt. First is the Debt Snowball method. It was popularized by Dave Ramsey. The belief that paying off smaller loans will give you a psychological achievement high pushing forward to trying to knock out more debt.
Basically, The Debt Snowball Method is paying off the smallest loans first then getting rid of the larger ones.
Einstein on compound interest “8th wonder of the world. He who understands it, earns it; he who doesn't pays it.”
Secondly, we have the Debt Avalanche method. You will knock out the highest interest loans first then work your way down to the lowest loans.
How the Debt Snowball Method Works:
“Compound Interest is the 8th wonder of the world. He who understands it, earns it; he who doesn't pays it.”
The Debt Snowball Method, step by step:
Step 1 – Add up all of your debt. List every. single. one. Be sure to include the total amount owed and minimum monthly payments required for each one.
Step 2 – Now list all your debts from smallest to largest.
Step 3 – Make the minimum payments on all debts except the smallest. Pay extra on the smallest debt, paying as much extra on it each month as you can.
Step 4 – Once the smallest debt is paid off, apply the same strategy to the next smallest debt. Continue until all of your debt is paid off.
The debt snowball method allows your payments to snowball, so that each debt is paid off faster.
After these steps, the person in debt will have a great feeling of knocking off one debt at a time until all the debt is paid off. That is great news!! Who doesn't want to be debt free?
How the Avanlanche Method Works:
Step 1: Add up all of your debt.
Step 2: Now list all of your debts from Largest to smallest interest rates
Step 3: Make the minimum payments on all debt except the highest interest rate. Pay extra on the highest interest rate.
Step 4: Once the highest interest rate debt is paid off, apply the method to the rest of your debt. Rinse and Repeat.
You have two methods to help pay off debts. Each one works for a certain type of person. I am one person that dislikes losing money.
With the Debt Avalanche you are able to get rid of the highest interest rate first. Oftentimes people may have credit card debt or high student loan interest that can increase the amount owed if it is not paid off faster.
Compounding interest is great for investments, but can be a bitch on debts. When the interest rate is high that debt will increase faster and faster. It is better to get rid of it first in order to save more money.
Can we Use both?
The debt snowball does make sense for many people. A mortgage is a debt that can be hard to get rid of fast, but it will also have a lower interest rate as well. A credit card debt can snowball into massive debt, but it is usually a smaller debt than a mortgage. So I see Dave Ramsey’s thinking of helping people with getting rid of these small debts first.
The Avalanche method takes everything into account. So It is a much easier process, you just look at the highest interest rate and knock it out.
My Student Loan debt:
My students loans had many different interest rates. The highest was 6.5%. The next highest was 5.7%, and then the lowest of the interest rates was below 3%. The highest loans I had was the 6.5%. I had a mission to get rid of that the fastest. If I could get rid of that the fast then the other debt would be much easier to get rid of.
When I moved to Taiwan, I was able to save much more money. It made it easier to push any savings or extra cash to knock out that 6.5% student loan. Once that was gone, I just kept moving down the list to knock out more loans.
Within a year of moving to Taiwan, I was able to knock out $15,000 USD in Student loans to be debt free.
Time to knock out Debt
Debt should not be something to hold your financial future on hold. It is time to knock it out and start investing for the future. Choose a strategy and knock out your debt.
” Spend less than you make, stay out of debt, and invest the rest”
I’m Steve. I’m an English Teacher, traveler, and an avid outdoorsman. If you’d like to comment, ask a question, or simply say hi, leave me a message here, on Twitter (@thefrugalexpat1). Many of my posts have been written to help those in their journey to financial independence. I am on my journey, and as I learn more I hope to share more. And as always, thanks for reading The Frugal Expat.