debt

  • Debt Snowball vs. Avalanche: Which Debt Payoff Strategy is Right For You?

    I spent years paying off debt with absolutely no plan in place.

    I would make the minimum monthly payments on my student loan each month. I also applied for the income-driven plans to try to reduce my monthly payments even more.

    When I started taking on credit card debt after my divorce, I did the same thing. I made the minimum monthly payments. I figured it wasn’t a big deal since my credit card had an interest-free promotional period.

    Eventually, it became clear this plan (or lack thereof) wasn’t going to cut it anymore. 

    First, the interest-free period on my credit card ended, and I realized just how damaging a 20% interest rate can be.

    Then my husband and I got married and had a combined six figures of debt. We knew we didn’t want that much of our monthly income going toward debt forever. 

    When we decided to get serious about paying off debt, I spent a lot of time playing around with different scenarios. I knew that the debt snowball and debt avalanche were the two most popular debt payoff plans, and I wanted to figure out which was best for us. 

    We ultimately chose the debt avalanche method to pay off our debts. It isn’t necessarily the right choice for everyone, but it absolutely is for us!

    In this post, I’ll dive into the different debt payoff plans — the debt snowball vs. avalanche. I’ll share the pros and cons of each and why we went the route we did!

     

    Debt Snowball vs. Avalanche: Which Debt Payoff Strategy is Right For You?

     

    Debt snowball vs. avalanche: Two popular debt payoff methods

    The debt snowball and debt avalanche are two popular strategies designed to help people pay off their debts. These methods give you a framework to follow so you know the order in which to prioritize them.

    The two methods have some things in common, including how they start. For both the snowball and the avalanche, you start by writing out a list of your outstanding debts, including your student loan, car loan, personal loan, credit card balance, and more. The only debt you might choose to leave off the list is your mortgage.

    That’s largely where the similarities end. Once you’ve listed all your outstanding balances, you prioritize your debts differently depending on the method you choose.

    Of course, there is no best way to pay off debt for everyone. Instead, different people will find a certain method that works best for them. But by sharing some of the pros and cons of these two popular methods, you can get an idea of which you may prefer.

    What is the debt snowball?

    The debt snowball is a debt payoff plan where you pay your smallest debts off first. Each time you pay off a debt, you snowball the money you’re saving into your next smallest debt.

    Here’s how the debt snowball strategy works:

    1. Make a list of all of your debts, from smallest to largest. 
    2. Decide how much you can afford to put toward debt each month. Ideally, this number will be larger than the sum of all of your minimum payments. 
    3. Make the minimum monthly payment on each of your debts except the smallest. Put the extra money each money toward that smallest debt.
    4. Once you pay off the smallest debt, take the money you were putting toward it each month and start putting it toward your next-smallest debt. 
    5. Each time you pay off a debt, your snowball will get bigger and bigger. Once you get down to the last debt – meaning the one with the largest balance – you’ll be putting your entire snowball toward it each month.

     

    PROS OF THE DEBT SNOWBALL METHOD

    The debt snowball gives you quick wins. By paying off your debts from the smallest balance to the largest, you get to celebrate another debt paid off more often. This can be a huge motivator!

     

    CONS OF THE DEBT SNOWBALL METHOD

    The debt snowball only considers the size of each debt, not the interest rate. This could result in you paying more in interest than if you did the debt avalanche. 

     

    What is the debt avalanche?

    The debt avalanche is a debt payoff plan where you pay off your debts in order of the interest rate, starting with the highest interest rate and working your way to the lowest. 

    Here’s how the debt avalanche strategy works:

    • Make a list of all of your debts, ordering them from the largest interest rate to the smallest.
    • Decide how much you can afford to put toward debt each month. Ideally, this number will be larger than the sum of all of your minimum payments. 
    • Make the minimum monthly payment on each of your debts except the one with the highest interest rate. Put the extra money each money toward that debt.
    • Once you pay off the highest-interest rate debt, take the money you were putting toward it each month and start putting it toward the one with the next highest interest rate. 
    • Each time you pay off a debt, your avalanche will get bigger and bigger. Once you get down to the last debt – meaning the one with the lowest interest rate – you’ll be putting your entire avalanche toward it each month.

     

    PROS OF THE DEBT AVALANCHE METHOD

    • The debt avalanche is the method that will have you paying the lowest amount in the long run. Because it requires you to pay down your high-interest debt first, you end up saving money.

     

    CONS OF THE DEBT AVALANCHE METHOD

    • And depending on how big your high-interest debts are, you might not have any wins for a while. It really doesn’t account for the fact that debt (and money in general) is a super emotional topic for most of us. 

     

    Which is best: Debt snowball vs. avalanche?

    Let me preface this by saying that personal finance is just that: Personal. And because of that, there’s rarely one financial decision that’s best for everyone.

    Having said that, I really encourage readers to use the debt avalanche in almost all cases. From a financial perspective, the debt avalanche is the better choice. 

    It will have you paying your debts off faster and saving money on interest. And depending on how much debt you have, the difference could be significant. 

    My husband and I have six figures of student loan debt and previously had significant consumer debt, and the difference between the debt snowball and debt avalanche was thousands of dollars! 

    If you want to see just how the numbers add up for you, you can use an online debt snowball vs. avalanche calculator or sign up for a free tool like Undebt.it, which helps you create your debt payoff plan and shows you which method makes the most sense for you.

    The only time I recommend the debt snowball is if you really struggle to stick to any sort of financial plan but are really motivated by wins. 

    Any debt payoff plan is better than no debt payoff plan at all. So if those little wins will be the only thing keeping you going, then that’s the right plan for you! 

     

    Other debt payoff methods to consider

    While the debt snowball and debt avalanche are the most popular of the debt payoff methods, they certainly aren’t the only ones. Some people choose to use a different method entirely or use a hybrid of the snowball and avalanche.

    When using a hybrid debt repayment method, you would use both the balance and interest rate of each debt to determine the order in which you pay them off.

    For example, the debts with the highest interest rate generally take first priority. But if you have a very small debt with a lower interest rate, you might pay that one off first just to get it out of the way.

    Another factor that people consider when prioritizing their debts is the emotional burden they create. When I had to take on credit card debt after my divorce, I had very strong feelings about that debt.

    More than any other debt I had, I just wanted it gone. Even if it had a lower interest rate than my other debts, I still would have paid it off first just to live with that emotional burden.

     

    What about other debt management tools?

    In addition to the frameworks available to help you pay off debt, there are also a few tools that people often turn to. These tools include balance transfer credit cards, debt consolidation loans, and more.

    In the right circumstances, these tools can absolutely be a good fit. Here are some articles that can help you determine if they’re right for you:

     

    Final Thoughts

    Hopefully, this post gave you a good overview of the debt payoff plans available to you. There isn’t one right choice that works for everyone. But one of these plans is sure to work for you!

  • Can You Pay Off Debt and Save For Financial Goals at the Same Time?

    If you’ve been reading this blog or following me on social media, you might know that my husband and I had a combined six figures of student debt when we got married. As soon as we said “I do,” we started an aggressive debt payoff plan.

    But you may also know that a few months after getting married, my husband and I bought an RV and got rid of our apartment so that we could travel across the United States full-time.

    So how did we rationalize spending money on other financial goals while paying off debt? And how did we get around the difficult decision many people face of whether to pay off debt or save?

    The good news is that you can do both! You can pay off debt early and still make room for other financial goals in your budget. There are a few things I recommend checking off the to-do list before saving for other goals, which we’ll cover later. 

    In this post, we’ll answer the question of whether you can save for financial goals while paying off debt and how to actually do it. 

     

     

    Make a plan to pay off your debt

    Before prioritizing any other financial goals, I recommend sitting down and crafting a solid plan to pay off your debt. This plan should include how much you’ll put toward debt each month and which debt you’ll pay off first. Once you know these details, you’ll know exactly when you’ll have your debt paid off. 

    I previously shared on this blog how we plan to pay off our six figures of debt.

     

    Make sure to build your emergency fund first

    Before saving for any other financial goals, your first priority should be to build an emergency fund. I wouldn’t put money toward other goals until you have this in place. 

    How much to save depends on several factors. While some personal finance experts recommend saving $1,000, I just don’t think that’s enough. If you unexpectedly lose your job, $1,000 likely isn’t enough to cover your bills for even one month. 

    I recommend saving at least 3-6 months of expenses. If you have a partner who can cover your expenses if you lose your job, you might be able to get away with three months. If you have irregular income or are self-employed, you may want closer to 9-12 months of expenses saved. 

    I also know that saving that much before you start tackling your debt can be difficult, so I recommend starting with at least one month of savings before turning your attention to pay off debt or save.

     

    Prioritize high-interest debt

    I don’t generally advise that people put their lives on hold while paying off debt. The one exception: high-interest credit card debt. 

    Unlike most debts, the interest rates on credit cards can exceed 20%. I know first-hand just how quickly that interest adds up when you are only paying the minimum payment each month. If you have credit card debt, I recommend putting all of your extra money toward that until it’s gone. 

    If you aren’t sure how to prioritize your debt, consider reading up on the debt snowball and debt avalanche methods, which create a framework to help you break down your debts in a way that makes sense financially.

     

    Treat your goal like a line item in your budget

    I know plenty of people who don’t think you should be spending money on other goals while paying off debt. But you’re already spending money on things. You’re probably paying for rent or a mortgage. You pay for groceries, insurance, the occasional night out, etc. 

    You’re able to spend money on these things because you make room for them in your budget. So when it comes to saving up for other financial goals, I recommend treating it just like any other line item in your budget. Just make sure it fits with your debt payoff plan! 

     

    Don’t take on any additional debt

    I probably don’t need to tell you this, but don’t take on more debt while you’re paying off debt! 

    I know how easy it can be to tell yourself that since you already have credit card debt, putting a little more on your card won’t make a big difference. It’s time to change your thinking here.

    I’m all for people going after goals such as vacations, weddings, or whatever it is you’re saving up for right now. But if you can’t afford to pay for these things in cash, don’t do them. Putting expenses on your credit card while paying off debt isn’t something I’d ever recommend. 

    In fact, only buying things you can afford to pay for in cash is just generally a good rule of thumb to follow, regardless of whether you already have debt. 

     

    Figure out where you can cut costs elsewhere

    I firmly believe that people can pay off debt and save for other financial goals at the same time. But most of us don’t have an unlimited supply of money, meaning you’ll probably have to make cuts elsewhere. 

    Go through your budget and figure out where you can cut. For example, do you really need to be eating out for lunch every day? Could you pack a lunch instead?

    I generally recommend cutting things that aren’t really important to you but that you spend money on for convenience or because you’re with other people who spend money on them. 

    You can also look at your financial goals and see where you can cut there. For example, could you take a more affordable vacation or save for a downpayment on a smaller house?

    My husband and I were planning our wedding while paying off debt. We decided early on that a big, expensive wedding just wasn’t a priority for us. We saved a lot of money on our venue, the food, our alcohol, and decorations without having to sacrifice having a wedding day we loved. 

     

    Final Thoughts

    I know how it can feel to be paying off a ton of debt and feel like you can’t spend money on yourself anymore. And while I’m all for making sacrifices to pay off debt faster, I also think there’s room for everything in moderation! 

    Whether it’s a vacation, a wedding, a downpayment on a home, or anything else, I firmly believe that you can make room for other goals in your budget while paying off debt.

  • 5 Money Mindset Shifts to Help You Pay Off Your Debt

    When Brandon and I got engaged, I knew that I wanted to come up with a plan to pay off our debt more quickly. After all, we had a combined six figures of debt, and I didn’t want that hanging over our heads for decades. 

    I knew that much debt would be a lot of work, but at that point, I had already dove into the world of personal finance. I knew the practical tips to follow to pay off debt faster. 

    And yet, I found myself struggling to sit down and come up with a real plan to put in place. 

    It took me a while to learn that it wasn’t the logistical steps of paying off debt that I was struggling with — It was the mindset. 

    All of the best advice in the world isn’t going to help you crush your debt if your mindset isn’t in the right place. 

    In this post, I’m sharing the five mindset shifts I had to make to help me pay off my debt. They can help you pay off your debt too!

     

     

    Let go of the victim mentality

    It took me a long time to stop playing the victim when it came to my debt and instead start taking responsibility for it. 

    I would blame the system for my student loan debt. I was angry to live in a country that puts people tens of thousands (if not hundreds of thousands) of dollars into debt for a degree.

    And I didn’t just do this for my own debt! I went through another round of it when my husband and I got married, as he had even more student loan debt than I did.

    I would also blame my ex-husband for my credit card debt. I believed that he had forced me into that situation through the circumstances of our divorce.

    And honestly, sometimes it feels better to have someone else to blame. It’s comfortable to believe that it’s not your fault. 

    But here’s the thing: Until you learn to take responsibility for your debt, you’ll continue to let that victim mindset keep you in debt. 

    In other words, you’ll believe that since you aren’t the one who got yourself into debt, you can’t be the one to get yourself out of it. 

    Once you really take responsibility for your debt and acknowledge that you took it on, you’ll understand that you and you alone have the power to eliminate it. 

    I do want to acknowledge that there are absolutely societal and structural problems that lead to people having debt that feels unmanageable. I don’t want to ignore those issues. But for the purposes of paying off your debt, I think it’s more helpful to focus on the things you can control.

     

    Let go of any shame or guilt

    It’s important to take responsibility for your debt, but it doesn’t help you to carry shame or guilt over it.

    In a perfect world, none of us would have debt. In a perfect world, you would have found a different solution rather than borrowing money. 

    But we don’t live in a perfect world. And more importantly, there’s absolutely nothing you can do today to go back and change the decision you made. 

    The more time you spend sitting in shame and guilt regarding your debt, the less time you spend focusing on how you can pay it off more quickly. 

     

    Be grateful for your debt

    You’re probably reading this and thinking that it sounds ridiculous to be grateful for your debt. But hear me out. You can find something good that has come of your debt if you look hard enough.

    Maybe it’s that you really love your job, and you only could have gotten it with a college degree. For that reason, you can be grateful for your student loans. 

    Maybe it’s that taking on credit card debt is what allowed you to leave a bad relationship and start over somewhere else, even if you couldn’t do it in cash. 

    Or maybe you’re like me, and your debt helped you to get back on track financially. If I hadn’t been stuck with credit card debt after my divorce, I wouldn’t have learned finance. And if I hadn’t learned finance, I wouldn’t have my business today. 

    Having debt is also what helped my husband and I to get so serious about budgeting. Sure, it’s still going to take us years to pay off our six figures of student loan debt. But when the debt is gone, we’ll have those good money habits forever. 

     

    Believe that you can pay off your debt

    Have you ever talked yourself out of getting serious about paying off debt because you felt like no matter what you did, you’d never get there?

    That’s what limiting beliefs do. They stop you in your tracks and prevent you from making real progress. 

    At the end of the day, you won’t be able to pay off your debt until you really believe that you can. And once you believe you can, you’ll be amazed and the ideas you come up with to help you get there. 

    If you’re struggling with this one, something as simple as putting a post-it note on your desk with a positive reminder can be a huge help!

     

    Learn to think outside the box

    I can’t tell you how many times I stared at my budget, having no freaking clue what I was going to do, because there just wasn’t enough wiggle room to aggressively pay off my debt as fast as I wanted to. 

    I know so many people who are in this exact situation. They think they don’t make enough money to pay more than their minimum payments on their debt. 

    That’s when you have to get creative. 

    I decided that I didn’t want to cut anything else from my budget. I wanted to have the money for date nights with my husband and to spend money on things that bring us joy. 

    So instead of trimming my budget even more, I increased my income. For me, freelance writing was the answer. I already knew a lot about personal finance, so I decided to start writing for other people’s websites. 

    For you, it might be something else. Maybe you’ll give pet sitting a shot, or deliver groceries part-time. 

    There are so many options out there, you just have to think outside the box.

     

    Final Thoughts

    When I first started paying off my debt, I wanted all the tactical budgeting tips to help me get there. But what I eventually realized was that if I didn’t first fix my mindset, I’d never be able to fix my budget.

    If you’re struggling with debt, I sincerely hope you give some of these mindset shifts a shot.

  • Should I Refinance My Student Loans?

    When my husband and I got married, we had over six figures of student loan debt. It wasn’t exactly the ideal way to start our life together. 

    However, it did force us to have a lot of money conversations early on and make sure we were on the same page with our finances. And for that, I could not be more grateful. 

    One of the topics of conversation was the fact that, while most of our debt was from federal loans with reasonable interest rates, he had one private student loan with an astronomical interest rate — About 14%. Yeah, that was painful. 

    One of the first money decisions we made together was to decide to refinance that private loan. With literally only a few minutes of effort, we were able to reduce his rate by about 60%. When we ran the numbers, we found that we were saving ourselves tens of thousands of dollars over the life of the loan. 

    Refinancing a student loan is an amazing way to reduce your interest rate and save yourself a ton of money in the long run. 

    In this article, you’ll learn what student loan refinancing is, whether student loan refinancing is the right choice for you, and how to refinance a student loan. 

     

    Should I Refinance My Student Loans?

    There are affiliate links in this post, meaning I may make a small commission at no additional cost to you. For more information, see my full disclosure policy here.

     

    What is student loan refinancing? 

    Refinancing a student loan is essentially taking out a new loan to replace your old one. When you refinance a student loan, you take out a loan from a private lender. That lender pays off your existing loan, and you now have a new loan with new terms, a new interest rate, and a new monthly payment. 

    You can refinance both private and federal student loans, though certain types of loans may make more sense for refinancing. 

     

    How do I know if refinancing is right for me?

    The primary reason to refinance a student loan is to save money over the life of the loan as a result of a lower interest rate. In the case of Brandon and I, we reduced our loan by more than 60% and saved our future selves tens of thousands of dollars. 

    Here are some reasons that student loan refinancing might be the right choice for you:

     

    YOU HAVE A LOT OF STUDENT LOAN DEBT

    Even with aggressively paying down our loans, it’s still going to take Brandon and me years to pay them off. For that reason, any reduction in interest rate would have been worth it for us. If you know you’re going to be paying down your loans for many years, refinancing to a lower rate is definitely worth it!

     

    YOU HAVE HIGH-INTEREST DEBT

    Even if you don’t have a ton of student loan debt, a high interest rate can be miserable. I know far too many people who see their student loan balances increase because of interest! If you have a high rate right now, refinancing is definitely something to consider.

     

    YOU HAVE A STABLE INCOME AND A GOOD CREDIT SCORE

    While it would be amazing if everyone could refinance to a lower interest rate, that’s simply not how it is.

    Just like qualifying for any other loan through a private lender, refinancing your student loans with a low rate will require you to have a credit score and income that makes you a desirable loan candidate. If you do have an excellent credit score, you may be able to get a really good rate. 

     

    How do I refinance my student loans?

    Alright, we’ve talked about what student loan refinancing is and when it might be the right choice for you. But how the heck do you actually do it? Luckily, it’s a lot easier than you may think.

     

    STEP 1: REVIEW YOUR CREDIT REPORT

    First of all, I definitely recommend doing a quick review of your financial situation before applying for any loans. The last thing you want is to fill out an application and find that your credit score has unexpectedly dropped or that you have a negative mark on there. 

    Checking ahead of time will help you to avoid any unwelcome surprises. If you check your report and your score has dropped or there’s a negative mark, you may want to take some time to get that ironed out before refinancing. 

     

    STEP 2: SHOP AROUND FOR DIFFERENT RATES

    Don’t just pick a lender because someone else used them. Spend some time shopping around. Lenders will allow you to fill out a prequalification form, and it only takes a few minutes. That way, you’ll be able to compare a few different offers. 

     

    STEP 3: CHOOSE THE BEST OFFER FOR YOUR SITUATION

    Once you have all the offers in front of you, you can choose whichever one is right for you. It usually makes sense to go with whichever company offers the lowest interest rate, but make sure to read all of the terms, such as the repayment period and forbearance options. 

    If you’re shopping for a loan to refinance your student loans, I recommend Credible. You can see rates from more than a dozen different lenders to find the best loan for your situation.

     

    STEP 4: FINALIZE YOUR NEW LOAN

    After you choose a lender, you’ll probably have a bit more paperwork to fill out to finalize the loan. Then they’ll handle the process of paying off your old loan, and it’s just a matter of making your monthly payments!

     

    When is refinancing not a good idea?

    Refinancing your student loans is an excellent choice for some people. In the case of my husband and me, refinancing his student loan is saving us tens of thousands of dollars over a period of several years. 

    But it’s also the case that refinancing simply isn’t for everyone. Let’s talk about a few of the reasons why you might be better off not refinancing your student loans. Some of these reasons are specific to people with federal loans, while others apply to anyone. 

     

    IF YOU’RE ON THE PATH TO STUDENT LOAN FORGIVENESS

    There are several federal student loan forgiveness programs available to individuals working in certain fields, such as teachers and public servants. 

    However, these programs are only available for federal loans. If you refinance loans with a private lender, you are no longer eligible for those programs. If you think you’ll be able to take advantage of one of those programs, you may be better off not refinancing. 

    As a note, please do a LOT of research on these programs before you get your heart set on them. Student loan forgiveness is never a guarantee and plenty of people who expected to have their loans forgiven have thus far been denied. 

     

    IF YOU NEED AN INCOME-DRIVEN REPAYMENT PLAN

    Like so many recent college graduates, I remember being so excited when I learned about income-driven repayment plans. After all, I was a low-paid government worker and wanted to be able to reduce my monthly student loan payment as much as I could. 

    Then it became clear that the lower my monthly payments, the longer it would take me to pay my loans off. For that reason, I generally don’t recommend income-based repayment plans (or limiting yourself to your minimum monthly payment). 

    That being said, I recognize that many of us go through situations in life (myself included) when our income is low and we just can’t swing a higher payment. Heck, one of the first phone calls I made after my divorce was to my student loan lender, asking them to lower my payment based on my income. 

    If you currently rely on an income-based repayment plan to afford your bill each month, refinancing is not for you. Private companies are far less likely to offer these plans.

     

    IF YOU CAN’T QUALIFY FOR A LOWER RATE

    The big benefit of refinancing your student loans is to reduce your interest rate. My husband and I were able to reduce his rate by more than 8% by refinancing — We won’t talk about how outrageous it is that his rate was high enough to be reduced that much in the first place. 

    If you already have a very low rate or you shop around and find that you can’t qualify for a lower one, then refinancing is not for you. You definitely don’t want to refinance for a higher rate!

    If your credit history is preventing you from getting a better student loan refinance rate, take the next 6-12 months and work on boosting your credit score so you can try again in the future. 

     

    IF YOU MAY NOT BE ABLE TO MAKE YOUR LOAN PAYMENTS

    The federal government has programs in place that borrowers can take advantage of if they run into financial hardship and can’t pay their monthly loan payments anymore. Private companies aren’t always so understanding. 

    If you’re struggling to make your student loan payments and legitimately fear the day is coming when you won’t be able to pay, I wouldn’t refinance from a public loan to a private one. 

     

    Final Thoughts

    I can entirely relate to the feeling that you’re never going to get those loans paid off. I understand the anxiety that comes with seeing the amount that you owe increasing each month rather than decreasing because your interest rate is so high. 

    Trust me when I say: I understand.

    Refinancing isn’t for everyone, but being able to refinance your student loan can be a serious game-changer for reducing your monthly payment, reducing your interest rate, and saving yourself a hell of a lot of money in the long run.