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October 2022
AuthorJeff Venables is a Christ-follower, husband, father, high school chemistry teacher, Dave Ramsey certified financial coach, runner, and blogger. |
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Crush that Debt!12/1/2020 Debt = Bad. We advocate paying off all debt as quickly as possible and avoiding borrowing ever again. The reason that paying off debt is the second baby step in Dave Ramsey’s Financial Peace is that debt will prevent you from doing all the other things to win with money. Debt robs you of your future. Maybe your debts seem overwhelming. Is there a way to pay it all off? Yes. There are two basic approaches that many people have found to work successfully to pay off debt. Both will work, and both will require some sacrifice and determination. Neither is a “magic bullet.” These two approaches are the Debt Avalanche and the Debt Snowball. Let’s start with the debt snowball. List all of your debts based on the total balance owed. Start with the smallest. You should make a list, showing the name of the debt, balance owed, and minimum payment. It might look like this: As long as you can afford it, you need to make the minimum payments on all of the debts. Let’s say you do your monthly budget, find ways to save by cutting out cable TV and reducing eating out (just examples), and that leaves $1250 in the budget to pay debt. First step, don’t use the credit cards – ever again! Make all the minimum payments, and pay the extra $335.05 on the car loan. Do this until the car loan is paid off, then cross if off the list. Now, take the $619.61 that you were paying on the car loan, and add it to the $146.78 minimum payment on the VISA card. This is called a snowball because you are gaining momentum and making larger payments as you pay off debts. Once the VISA is paid off, roll that payment into the MasterCard payment. Then, once that is paid off, the entire $1250 is paid monthly towards the student loan. Of course, if you have any “found money” along the way, you should use it as an additional payment towards whichever debt you are paying. The biggest strength of the debt snowball approach is the psychological advantage of seeing progress and staying encouraged as you pay off the debt. Now, let’s look at the Debt Avalanche. This is the more solid mathematical approach to paying off your debt while minimizing interest paid. But, it lacks the psychological advantage of seeing entire loans/credit cards get crossed off the list quickly. We will list all of the debts again, but this time, we will list them from highest interest rate to lowest. We attack the debt with the highest interest rate first. If we take the same debts for the same family, it may look like this: So, we essentially do the same thing we did for the debt snowball, in that we make all minimum payments, find money in the budget to make an extra payment, and pay off one debt first. But, instead of starting with the lowest balance, we start with the highest interest rate. So, the extra $335.05 in our budget goes towards the MasterCard until it is paid off. Then we roll the $335.05 and $186.61 into the payment on the VISA card, and so on. This approach will make the total amount you pay to get out of debt less than the debt snowball, because you are getting rid of the highest interest payments first.
We often hear that this is a no-brainer – the debt avalanche is the better approach. Mathematically, this is true. But, as Dave Ramsey says, if we were that good at math, we wouldn’t be in this situation to begin with. Debt is often a psychology/behavior issue. So, the advantage of the debt snowball is that you can see progress faster, and seeing progress often keeps us motivated. To wrap up, you can use either the debt avalanche or the debt snowball – both approaches are proven to work to get you out of debt. But you have to be committed to getting out of debt, and to staying out of debt, in order to win with money. If you can sell some stuff along the way, do it. Use the money to accelerate your progress towards being debt-free. Do you need someone to help? Schedule a consultation with one of our coaches today. Our coaches will help you come up with a plan, not just for getting out of debt, but for continuing your journey of winning with money!
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