Debt Snowball Vs Debt Avalanche | Which is the Best Debt Payoff Strategy?

in this video I am going to explain how to get out of dad step by step including a magical extra step that is often overlooked but can make a tremendous difference over the years we've helped hundreds of people struggling with debt to get completely out of debt much quicker than they ever thought possible now if you are already debt free congratulations but even if you are most likely you know and care about someone that isn't and you may want to share this video with them first let me clarify what I'm not talking about in this video I'm not talking about bankruptcy or debt settlement or credit counseling those are what we call hardship programs when you have fallen behind on payments I'm not talking about any of the hardship payment programs that are out there that will be a different video the strategy I'm going to share is for those who have debt they have income and they are consistently making ontime payments and they can continue to do so but they're not making any real progress when you are servicing debt it's not only the interest cost that's sucking you dry but it's also the interest that you're not earning as a result of the debt debt is a major obstacle preventing many people from adequately saving and earning compound interest in other words Consumer Debt comes with a huge opportunity cost okay so let's get into it and go to explain how to get out of debt step by step including the magical extra step first you're going to want to list out your debts so you just use a piece of paper a spreadsheet if you prefer and there's going to be five columns the Creditor balance the rate the minimum payment and extra then list out all the debt details including credit cards auto loans medical bills student loans parent loans mortgages anything with a balance that could be permanently paid off don't include expenses such as utility bills or rent payments those are not debts those are expenses right write down the outstanding balance the interest rate and the minimum monthly payment for each debt and it's important that in the payment column it's the actual minimum payment if you're consistently paying more than the minimum identify the extra in the extra column okay do that for each debt add up the total extra that you're regularly paying and that you are able to pay each month next you want to prioritize the payoff order there are two different ways to do this the debt snowball or the debt Avalanche with the de snowball method you ignore the interest rates and you prioritize the payoff by the balance size the smallest balance first then moving to the next smallest balance okay with the debt Avalanche method you ignore the size of the balance and you prioritize the payoff order by interest rates highest interest rate first and then move to the next highest rate either approach will work but the debt Avalanche method is mathematically Superior you will pay less interest and you will get out of debt in a shorter time frame when paying off the highest interest first okay the Deb snowball method you could say is emotionally or psychologically superior meaning you're able to see progress sooner and so that may keep you motivated to keep going both methods will save you a ton of interest and a ton of time and help you get out of debt way ahead of regular schedule there's really not a huge difference between the two but like I said the debt Avalanche method ranking them by the highest interest rate is mathematically Superior when you include this additional magic step that I'm going to be explaining it makes doing that Deb Avalanche quite simple now let's look at a SLE case for Joe and Jackie so take a look at my screen and you can see we have our five columns creditor the balance the rate the payment and the extra and you can see that they have a total of seven Deads they have three credit cards they have a car loan medical bills a truck loan and a mortgage and we've got all of their uh balances identified total of 35,500 that they owe total right including their mortgage uh and then you got the interest rates listed out per debt and their minimum payments so Joe and Jackie have been paying extra on some of their debts on five of them they've been adding an extra $100 and so uh down below you can see we have an extra total of $500 in this case now your scenario may look entirely different of course it will um and you may not have much of any extra that doesn't mean this doesn't work it absolutely does but if you've got some extra that's that's just going to help move things along faster right okay so if you look at the total of the payment column their total minimum monthly payments are $2,630 and so that's their minimum obligation they are working and they have income and and they they're able to make that um without any trouble and they're adding an extra some extra money to that as well right but but if they if they follow the same kind of traditional approach um they're going to be in debt for a very long time and they're going to pay way more interest than is necessary and so using either the debt snowball or the the debt Avalanche um in this case we're going to use the Deb Avalanche and we're going to rank them by interest rate so you can see that there credit card number three has the highest interest rate and so that is going to be our primary target so their payment their minimum payment is $255 and now we're going to add that $500 extra just to that one debt so we're going to focus on the priority debt and so $755 is going to be going to that credit card and it's going to be paid off in 13 months so in one year that's gone and then as soon as that de is gone on you're going to take that 750 and we're going to add it to credit card number two which is the next highest interest rate so combined that's going to be $875 a month pounding down on that credit card and 17 months total and it's it's done so a year and a half and two the credit cards are are gone okay and then we just continue that strategy following paying the highest interest rate and the thing that's consistent here is the monthly amount see so there total obligation is 2,630 and we're adding to 500 so their total monthly commitment or debt plan we'd say is 3,130 so that 3,130 is all they have to to pay each month consistently they don't have to worry about changing that or increasing it and you certainly don't want to decrease it but it's just that consistency and rolling it down and you're going to um save yourself a ton of interest and get out of that quickly so let me just show you how long it takes so to have all of the debts paid off except for the mortgage it's um 39 months so that's 3.2 years three only 3.2 years cars are paid off credit cards are paid off medical bills are paid off the only debt they have left is their mortgage so now they have a choice if they say well let's let's go ahead and pay the mortgage off they're going to add that to the mortgage it's it's n it's $1,930 on top of their mortgage um their mortgage will be paid off in seven years after that and so the total debt including their mortgage everything is paid off in 10.3 years with this example and they didn't really increase the amount that they were paying they just they just locked in and they had a plan and they had a strategy and so you can accomplish something amazing things right now when it comes to their mortgage when they've paid off all the debt and we get to the mortgage there's a decision to be made if paying off the mortgage early is is a goal then go for it um but there are some others considerations and this where we get into the discussion of good debt versus bad debt um many people um would choose to rather than so that rather than taking that $1,930 and paying it extra on the mortgage they start to save or into or invest that money so almost $2,000 a month now is going into savings and if they did that for the next seven years then their earning interest um greater than what the the mortgage is especially if you have a a low mortgage a good rate on your mortgage then um there there becomes a decision to to be made there is an opportunity cost and so um I I made another video on that subject but it's your preference if having the peace of mind if having that mortgage paid off then then go for it um if you want to use some leverage and and end up with more money in the long run then uh you may consider some other strategies there come your age comes into play your goals your RIS tolerance there's a whole bunch of things that come into play that's going to make that decision and so like I say that that's that's a for another video so what is the additional magic step that is often overlooked it is the power of automation when you make this process automatic you make it easy on yourself so how does that work what you do is you set up an additional checka account at your existing bank or credit union this additional checka account has one purpose and that is to create automated discipline for your debt plan you should give this new checking account a name and distinguish it from your regular checka account I would suggest you call it your debt Freedom account after you establish your de Freedom account you ask the bank to set up automatic transfers from your regular checking account to your de Freedom account that lines up with the timing of your payday schedule in our example case with Joe and Jackie the total monthly debt plan was a monthly amount of 3,130 so 3,130 would need to be automatically transferred and separated from their other income and regular spending account depending on the payroll frequency and depending on your due dates of you know of each debt you need to establish a schedule that will work with you for you and your cash flow um whether you're paid weekly or bi-weekly or twice monthly you'll likely need to have more than one automatic transfer happening per month but getting this set up you know it takes a little effort but it is so worth the effort it goes on autopilot ideally you can add another layer of automation by using your bank's online bill pay system to establish a recurring debt payments from your Deb ROM check account so it's happening automatically um and then when your debts one Debs paid off you make the adjustment and you power down the next debt whatever your total monthly debt plan amount is it's earmarked and dedicated to pay down the Deb this forces you to live on the rest it's similar to having taxes withheld from your paycheck your taxes are removed before you ever see it and which makes it impossible to spend this does take a little effort like I said but it when you do this you have a serious plan of action and debt freedom is on the horizon this automatic transfer principle of out of sight out of mind is also a superpower for saving and investing when you set it up to save and invest automatically you are also forcing yourself to live whatever's left over and your financial situation improves dramatically I hope you enjoyed this video I hope you'll share with others that could benefit from it and for additional information we have resources on financial fastlane.com and I look forward to seeing you in the next episode of the financial fast [Music] LAN

Channel: Financial Fast Lane

Views: 3,902

Keywords: debt snowball, how to pay off debt, how to pay off debt fast, dave ramsey, debt snowball method, dave ramsey debt snowball, the dave ramsey show, debt-snowball method, pay off debt using the debt snowball, debt snowball vs debt avalanche, debt free, personal finance, debt payoff, credit card, paying off debt, pay off debt, compound interest, debt snowball dave ramsey, debt free 4 life, paying off debt fast, debt payoff motivation, debt payoff planner, debt payoff app

Id: yPbY2Qi0ED0

Length: 13min 2sec (782 seconds)

Published: Thu Mar 14 2024