LA
Liz Alterman
3 months ago

Using the Avalanche Method as a Strategy for Paying Off Debt

money
debt
I know what you’re thinking: If I’m already buried under a mountain of debt, the last thing I want is an avalanche metaphor. 

But ironic naming aside, this debt-elimination technique is your ace in the hole if you’ve got tons of high-interest debt and not clue how to start whittling away at it. Here’s the 101. 
I know what you’re thinking: If I’m already buried under a mountain of debt, the last thing I want is an avalanche metaphor. 

But ironic naming aside, this debt-elimination technique is your ace in the hole if you’ve got tons of high-interest debt and not clue how to start whittling away at it. Here’s the 101. 

Why the avalanche metaphor?

Picture a snow-covered mountain peak crumbling down the mountainside, starting as a ferocious behemoth and ending as a light dusting by the time it hits the ground. The avalanche method of attacking your debt follows the same trajectory.

In money terms, this means putting the majority of your payments toward debt with the highest interest rates first, while only making minimum payments on all other outstanding balances. 

The rationale behind this strategy is that you’ll eliminate the debt that’s costing you the most in interest. That’s important, because when it comes to debt, interest is your mortal enemy. 

It is seriously devastating to make minimum payments on a giant balance, only to watch it mushroom month after month because you’re just paying interest and not actually reducing the principal (a.k.a. the amount you actually borrowed). 

According to the avalanche method, once you’ve paid off the debt with the highest interest rate, you move on to the one with the next largest interest rate, keeping the rest at minimum payments (then rinse, repeat until all your debts are repaid).

Okay…so how do I start?

Make a list of your outstanding debts in order from highest to lowest interest rates, then consider the dollar figures on the debt. 

Example time!

Let’s say you have three different debts:
  1. Student loans with a balance of $22,000 at 3.6 percent interest 
  2. An auto loan with a balance of $4,000 at 4.2 percent interest
  3. $7,000 in credit card debt at 14.4 percent interest

You’ve got $750 per month available for repaying all of these. But how much should you put toward each?

According to Mr. Debt Avalanche, the answer is C. Why? Because that 14.4 percent interest is going to end up costing you the most month to month. (Some quick math makes this obvious: 14.4 percent of $7,000 is more than $1,000 per month in interest! YIKES.)

So, if each debt has a hypothetical minimum monthly payment of $75, you’ll put $75 toward your auto loan and your student debt (that’s $150 if you’re keeping track) and devote the remaining $600 toward your credit card debt. 

Do this every month until your credit card is paid off. (And don’t rack up more debt while you’re doing it! Step away from the flash sale.)
 

But I just want to get rid of the big balances!

I know, the higher numbers are scary, but throwing the bulk of your money at the loan with the biggest price tag doesn’t mean you’re getting rid of your debt as quickly (or as cleverly) as possible.

Focus on where you’re losing the most money in interest. The debt avalanche method minimizes both the total amount of money you’ll spend in interest as well as the amount of time it takes to pull yourself out of debt because you’re stopping interest from building on itself (that’s “compounding” in financese) at the highest rate. 

Pro-tip: try to lower your rates.

Just because you got stuck with high interest rates when you took out that loan or opened that credit card doesn’t mean you’re stuck with them forever. 

At literally any time, you can attempt to have your interest rates lowered. You’d be surprised what can happen if you pick up the phone and call your credit card company (especially if you’ve had the card for a while—creditors loooove loyalty). 

Talking to a customer service rep might be your own personal form of torture, but if you come out of with a few percentage points knocked off your monthly bill, it’s worth the cringey few minutes. 


AB
Alma Bahman
3 months ago

Roll On Over to the Debt Snowball Method

adulting
debt
Paying down debt seems straightforward: you borrow, you pay back, you don’t owe anymore. Ha! If only it were that simple. The truth is, it’s all too easy to get behind in payments and watch the total amount you owe grow exponentially due to that pesky thing called interest. 

The proof?
Paying down debt seems straightforward: you borrow, you pay back, you don’t owe anymore. Ha! If only it were that simple. The truth is, it’s all too easy to get behind in payments and watch the total amount you owe grow exponentially due to that pesky thing called interest. 

The proof? The average American household owes $137,063 in debt (including mortgages). But fear not, Nav.igators: Having debt doesn’t mean a life sentence of eating only ramen and living in your mom’s basement. (Just take it from our friend, Whitney, who paid off her debt and celebrated in Hawaii.)

The snowball method will help you chip away at your debt little by little, building your financial momentum from a handful of flakes into a big beautiful snowman of fiscal responsibility. 

It’s less about the money and more about your mindset.

You might have heard of this debt-reduction technique from a guy named Dave Ramsey, a multi-hyphenate entrepreneur and author of several financial advice books (NBD). He’s made debt snowballing a cornerstone of his business helping people get out of debt. 

According to Ramsey, the true value in this method is the effect it has on your morale. “It’s designed to modify behavior,” Ramsey says. “It lights your fire. Once you get a few quick wins under your belt, you’ve got momentum!”

The process goes like this: Pay off your debts one at a time, from smallest to largest dollar amount, regardless of interest rate. After you eliminate the smallest debt, you apply the same amount of money you were putting toward that debt to the next highest one, and so forth. 

The more money you can put toward your payments, the quicker it goes. Just like a snowball rolling down a hill, you’ll build debt-busting momentum the faster you move.

Keep the ball rolling.

Debt snowballing is all about motivation, and while you might think that’s a little hippie woo-woo for you, it’s actually been scientifically proven to work. 

A 2016 study in the Journal of Consumer Research found that focusing on one debt at a time (instead of paying down multiple debts simultaneously) was more motivating to debtors, especially when they paid off small debts in quick succession (a.k.a. “snowballed”).

All you type-A’s who get exhilarated by checking items off your to-do list know exactly what this feeling is like. It’s all about the little victories.  

Is the snowball right for you right now?

Debt snowballing will work, but just like anything else with finance, it really depends on your current situation. “Some people eliminate debt faster than others, but everyone who sticks with it will get rid of debt,” Ramsey says.

Debt snowballing is just one of many strategies for paying off debt. So, it’s totally worth asking yourself if plowing through your debt is the best strategy for you. Are you more concerned with paying the least amount of interest possible? Or are you more concerned with building up savings first?

Answer that question and you’ll be on your way to strategizing your debt escape plan.


WH
Whitney Hansen
5 months ago

Part 2: The Ultimate Guide to How I Paid Off My Debt and Celebrated in Hawaii

travel
debt
If you haven’t yet read part 1, go back to get the foundation for how I paid off my debt ($30,000 !!) in just 10 months. If you have, you’re ready for the tools to my success.

Step 3: The tools
Paying off debt is not an easy task. A plan isn’t enough. Working two jobs isn’t...
If you haven’t yet read part 1, go back to get the foundation for how I paid off my debt ($30,000 !!) in just 10 months. If you have, you’re ready for the tools to my success.

Step 3: The tools
Paying off debt is not an easy task. A plan isn’t enough. Working two jobs isn’t enough. Sacrificing isn’t enough.You need to have the right tools under your belt.

Don’t underestimate the importance of creating an effective budget. Creating a budget is nice and even easy to do ...but creating an effective budget--that’s a different story.

Fortunately, I learned some extremely valuable tips to creating a budget that works. Effective budgeting makes your money start working for you. It takes into consideration paying off debt, building up an oh sh*t emergency fund, saving for retirement, and even sneaky expenses like holidays and birthdays. (Pro-tip: using the Nav.it app can make all of this even easier.)

Trick to saving hundreds in student loan debt
One trick to how I paid off my debt is by paying principal only. Your payment is composed of two main pieces: principle and interest.

When you make a payment, the amount paid is divided into interest and principal. Paying principal only means that your money is going toward the amount borrowed only--and NOT to the banks pockets.

But did you know you can’t pay principal-only on student loans?
Don’t worry; I learned a secret workaround for this. This secret literally saved me hundreds of dollars. I put my findings in this handy cheat sheet and added a couple more tips in the cheat sheet as well. It’s free, so download it, print it off and keep it handy as you go through your process of paying off student debt.

Stay motivated throughout the process
Getting out of debt isn’t easy. You have to keep going back to your “why” to stay motivated and on track. Ask yourself these questions:
  • Why are you getting out of debt? 
  • What are the feelings you felt that led to you wanting to make this change? 
  • Are you embarrassed? Did you overdraft your checking account? 
  • Did you not have enough money in your account to buy groceries? 
Reminding yourself of your story and your "why" will keep you motivated throughout this process. That’s how I paid off my debt.

Step 4: Living a Debt-Free Life
Do you know how nice it is to have the freedom to travel whenever you want, spend $500 on a shopping trip guilt-free, and purchase luxury items? It’s not out of your reach.

You can do it.

In May 2014, I went to Kauai. Kauai is a beautiful, beautiful island. I hiked along the Napali Coast, some of the most rugged and gorgeous terrain; snorkeled with tropical fish and turtles; watched endangered monk seals snooze; rode in a helicopter around the island; drank Mai Tais, relaxed while reading on the beach; and my favorite memory--got caught hiking in a tropical rainstorm.

But the best part of livin’ the debt free life…When I return home, I have only the memories with me--and not the credit card bill. 

I also could start my own business without the financial stresses that go with it. As an entrepreneur, living a very low-risk life is important to me and keeping my monthly expenses to a minimum makes a huge difference in business growth versus business flop. 

Imagine what you could do if you were debt-free?

I really hope this post has helped you gain some insights around what I did to pay off my debt. I am a very normal, average, person. If I can do, anyone can do it. Go forth, and conquer your debt, Nav.igators!

If you're interested in connecting with Whitney Hansen for one-on-one coaching, reach out here. If you want to hear more from her, check out this episode featuring Whitney on the Nav.it podcast.


WH
Whitney Hansen
5 months ago

The Ultimate Guide to How I Paid Off 30,000 in 10 months

adulting
debt
2010 was a great year. I graduated college, I got my first “big kid” job at a public accounting firm and life was looking promising. There was only one problem. 

I had almost $30,000 in debt staring me in the face. 

For some, that is okay, student loans are normal. But I wanted to make my own choices instead of having debt make choices...
2010 was a great year. I graduated college, I got my first “big kid” job at a public accounting firm and life was looking promising. There was only one problem. 

I had almost $30,000 in debt staring me in the face. 

For some, that is okay, student loans are normal. But I wanted to make my own choices instead of having debt make choices for me. Intuitively I knew that $30k was a crap ton of debt. I couldn’t take a job at a non-profit (paid too little), and I couldn’t start my own business, because I had a debt to pay off. My paycheck was officially owned before I even got my hands on it.

Treating debt like a necessary part of your life will cost you. What are the costs, you ask? Well…
  • Thousands of dollars in interest
  • Hours of lost sleep
  • Stress levels that not even wine can cure and the most costly…
Your freedom. It took me years to figure out that debt was stifling my growth. I didn’t even know I had problem until it hit me in the face – rather abruptly too. Okay, let’s get down to business. This is exactly what I did to pay off $30k in 10 months.

Step 1: The Plan
In order to tackle the Goliath of a debt, I needed a plan. Something that was actionable, measurable, and ambitious. I also needed a pretty big shovel to fill the hole I dug myself in. 

I’ve always been a big believer in the saying…“If people aren’t laughing at your goals, you aren’t dreaming big enough.” My first goal was to pay off my debt in 12 months. When I shared this goal, I not only got some strange looks, laughs, and smirky smiles, but I was also told I set my bar too high.

Anytime you go about trying to achieve a massive and audacious goal, people will try to put your dreams down. Don’t let them. People project their version of the world onto you. If they don’t think it’s possible for them to personally accomplish the goal, they will tell you it won’t be possible for you to do it either.

On October 10, 2010 I wrote in a notebook: Pay off $30,000 by October 2011.

Thanks to the power of setting goals correctly (and a ton of grit), I actually beat my goal by two months. In August of 2011, I made my final student loan payment. That night, I slept like a baby.

Step 2: The Sacrifice
Part of my plan of paying off my debt was knowing that I had to make some really, really big changes. Cutting out buying coffee twice a week was not going to cut it. To get drastic results, I had to make drastic changes.

My pre-debt freedom situation:
  • Owned my own home
  • No car payments (thank baby Jesus!)
  • No credit card debt
  • Was in a serious relationship
  • College degree
  • $30,000 in debt
  • Great part-time job at a spa with extremely flexible hours
  • Landed a Staff Accountant position with a flexible schedule
 Here were the sacrifices I made:
  • Rented my home out for $100 per month more than my house payment & moved in with my partner (allowing me to pay lower rent)
  • Sold all my awesome furniture (this was a bummer-dude moment for me, but gave me a nice chunk of cash to start my debt-free process)
  • Worked two jobs, 70-80 hours per week
  • Didn’t have a day off for three months
  • Didn’t buy coffee for 10 months (I almost forgot what the inside of Starbucks looked like)
  • Packed a lunch every single day (to this day, I still bring a lunch every day)
And probably the most important sacrifice…my lifestyle. I knew I could survive on less than $25,000 a year. Heck, I knew with my house rented out I could survive on $15,000 a year. I lived in true “college student spirit” a little while longer. 

The two shovels that I used to fill the large “debt” hole:
  • Spa job: This was my job that put me through college. I lived on a solely commission-based income for 4 years and knew I could continue living off of it. Working part-time at the salon meant that my income would decrease to around $25,000 a year. I worked 26 hours a week and made 100 percent commission.
  • Accounting job: Accounting is very cyclical business. I was deeply needed for audits and preparing tax returns. I worked at the accounting firm 49 hours per week, and was paid once a month. This check went ENTIRELY to paying for my debt.
Have you ever been so busy that you literally couldn’t even make it to the bank, let alone go shopping? That was my life. Being so busy was a huge blessing in disguise. I didn’t even have time to spend money if I wanted to. My sacrifices were drastic (but passive streams of income can be game-changers).

I wanted unreal results, and I got them. It wouldn’t be fair if I didn’t discuss the financial tools I used to make this happen.

Next week, we’ll share how these and the perks of living debt free in the Ultimate Guide for How I Paid Off 30,000 in 10 months, Part 2. If you're interested in connecting with Whitney Hansen for one-on-one coaching, reach out here.
app-icon

Get the app - it's free!

Because every woman deserves to be financially confident