Debt: Snowball, Highest Interest Debt First, or Avalanche?
I'm In Debt
- Posted:
3/13/2009
For years I've been all about the debt snowball, the method Dave Ramsey recommends for getting out of debt. I've used it to reduce just about all of my credit card debt (I say “just about” because when I moved recently I needed to purchase a refrigerator and washing machine, and after paying for first month's rent and a security deposit, my cash savings were just about depleted – I charged the appliances, ugh!)
Debt SnowballThe idea of Dave Ramsey's
debt snowball is that you can get out of debt faster than you would by arbitrarily sending extra payments to some of your debts here and there. It gives you a repayment schedule that will accelerate your debt pay off. Each time you pay one of your debts off, the money you had been sending to those debts is then applied to the next account on your list. It builds momentum and motivation since you generally pay your first account off quickly, and free up extra money to send toward the next debt on the list (your payments get larger with each account you pay off; like a snowball rolling down a hill).
Highest Interest Debt FirstOn Destroy Debt, there is a Debt Tracker tool that will generate a variation of the snowball plan for you. In our method, the system will recommend that you pay the highest interest debts first, because while it may take longer to pay off the first debt on your list if your highest interest debt isn't your lowest balance, you will save money over the long term on the amount of interest you pay. Log into your account (create one if you don't have one, it's free) and click Debt Tracker on the right menu. Enter your debts with interest rates and balances owed, and you can get a series of reports and charts to show you how long it will take you to pay off debts using the highest-interest-first snowball method of debt repayment.
Debt AvalancheOn
ConsumerismCommentary.com, Flexo gives a better way to build a snowball. He calls it the Debt Avalanche. I love the image that comes to mind with “avalanche”... think of all that snow crashing down quickly, and who could resist paying off debt in the avalanche manner, right?
The Debt Avalanche method advocates for establishing an emergency fund first. You know that ideally you should have several months of living expenses saved in an accessible emergency fund (like a
high interest savings account, for example) But, considering you're reading this because you're trying to get out of debt, I'm thinking it would take a VERY long time to set aside that kind of money and in the meantime, you've lost that time to start focusing on paying off the debts that eat up your income each month.
So if you are going to work on the Debt Avalanche method, I would think setting aside about $1000 or so would be good enough to get started, and you can do this with your tax refund if you receive one, or by setting aside $25 a week (or as much as you can afford). Flexo then recommends that you negotiate with creditors and of course, commit to avoiding more debt (which should be obvious whenever you are working on paying off debt). The Avalanche has you paying off debts interest-order first, and using automated methods to pay your bills to ensure everything goes according to schedule!
Regardless of how you decide to pay off your debts, there is one common piece to the puzzle that I think most people forget or avoid: you have to reduce your living expenses to make it possible to pay more toward your debts. I write about saving money and living frugally a lot, as do a lot of other bloggers on Destroy Debt, here are some links to help you if you're new to this lifestyle (you might be surprised to find it's easier than you thought and it IS possible to still have a good lifestyle while cutting back expenses!)
Save Money On GroceriesFinding Money to Pay Off Debt FasterMake Your Own Laundry Soap
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