Debt Elimination Plan: Snowball or Avalanche

If you don’t have debt, you need to recognize that you one of the fortunate few. Our whole society relies on fast credit and “buy now, pay later” loans to operate. It seems normal for everyone to be in some sort of debt.

And once people stop taking on debt, often economies can be plunged into recession due to less spending. The New Zealand and Australian economies are currently at risk of this, much like what happened to the US in 2008.

When house prices rise rapidly there is a so-called wealth effect that homeowners experience. When homeowners see the price of their house value increase on paper, they are more likely to spend more by taking on debt. They feel more wealthy since their house has gone up in perceived value- value on paper. Money starts to flows into and around the economy driven by all this debt.

The opposite happens when house prices fall. Homeowners stop taking on debt and focus on paying the existing debt down. Money stops entering the economy. Business dries up. People can lose their jobs. The economy falls into recession.

Is Debt Irresponsible?

You might think that people who have debt are irresponsible and that they lack the self-control to delay instant gratification. In some ways you are right. But I would also argue that there are many people need debt to get by. Either to cover the difference between rising living costs and stagnating wages or to cover emergencies while already struggling to get by.

There are many ways that people get into debt. Getting an overdraft to cover the cost while studying. Financing for a car purchase. Payday loans to bridge the gap until your next payday. A mortgage for your house. Yes, a mortgage is a debt. Some people choose to call it good debt, but it is still debt nonetheless.

Debt is often not something that we talk about openly to friends and family. Heck, sometimes we even hide it from our spouses or partners. If you are hiding your debt from your partner you need to recognize that it is a serious problem. Much like an addicted gambler hides their gambling from there partner.

Talking about debt

Talking about debt is the first step to dealing with it. But when it comes to talking to partners or spouses, things can get heated. That is why it is best that when talking about debt you need to sit down and take the emotion out of the equations.

There should be no blame. You need to be very patient with listening and letting both parties express their thoughts and concerns. After all, the reason the debt may be hidden from you is that they feel like you would disapprove of the spending.

If this is the case, it is best to sit down and work out a plan to pay off the debt and then set up a discretionary spending amount in your budget for you both. You need to both agree to the amount. The money you allocated to discretionary spending a for you both to spend (or save) on whatever you want. This takes the guilt out of the spending, and then you are both less likely to hide the spending from each other.

Getting Out of debt

Whatever the reason for getting into debt, there are always ways to get out of debt. And to minimise the cost of you’re debt. And once the debt is gone, stay out of debt.

Debt is a quick solution to desires. Debt may afford you the luxury of having things now. But you will pay for them later. And more often than not, pay dearly. If you borrow $1000, at a personal loan interest rate of 18%, and pay $50 a month. You will pay an extra ~$200 for the privilege. And the more debt you are in, the more you pay for it.

So how can you pay off debt faster?

There are a few methods for paying off debt faster. The two most common approaches are the Debt Snowball or the Debt Avalanche. The secret to both is that you need to budget for extra repayments over and above the minimum payment. The differences being where you direct these payments.

Debt Snowball

The Debt Snowball method suggests you pay any extra payments to the debt with the smallest balance while paying the minimum on the larger debts. Once the smallest debt is paid off, you shift the extra payment to the debt with the next largest balance. And so on, until finally, you have paid all the debt off.

Debt Avalanche

The Debt Avalanche method suggests you pay any extra payments to the debt with the highest interest rate first. This results in the most cost-effective repayment strategy, meaning you will pay less in interest charges. Once the highest interest rate debt has been paid off, you move the extra payments to the debt with the next highest interest rate.

Which is better?

Which method is better? the debt snowball or the debt avalanche? Here is the truth. Stop focusing on which method you are going to use and just start paying down the debt. Just start! Being debt-free is the only way you will reach financial independence.

The first step to eliminating debt is to tighten spending in every category of your life and transfer this to your debt.

Want to go out for lunch? You can’t- you have a debt to pay. Want that new phone- you can’t, you have a debt to pay. Want to watch a movie- you can’t you have a debt to pay. You can see that what you have to cut from your budget are all the “wants”. Once you have paid down all your debt you can start to save so you can spend on all your wants. Then you can stay out of debt.

Remember that debt is just compound interest working against you!