Drowning In Debt — 2 Strategies Proven To Get You Out Of The Water

Tackling Debt

In order to get debt-free, you will have to make accelerated payments, which means paying more than the minimum or the agreed-upon amount. Now obviously this means we must find in our budget a way to increase the amount we can pay each month. I tell everyone to start by making an additional $100 a month to contribute to their bills. There are several ways to do this, from restructuring your budget to online surveys and many things in between. This may seem impossible, but that is our stress talking. When we are drowning in debt, we are unable to see things clearly. We are in survival mode. In order to tackle debt, we have to find a better way to look at our situation and find a way forward.

My two favorite debt handling strategies are the debt snowball method and the debt avalanche method. Both are highly effective at tackling all kinds of consumer debt ranging from personal, home, medical, and student.

Both the debt snowball and debt avalanche are centered on paying off one debt as fast as you can while paying minimum payments on the others. Focusing on eliminating one debt as quickly as possible and then rolling the balance into the next debt keeps the momentum and gives you tangible results to keep moving forward. These strategies differ by which debt you choose to start with. By the end of this article, you will have a deep understanding of how to deploy either the debt snowball or debt avalanche into your finances and begin your journey into financial freedom.

Key Characteristics:

• Both the debt snowball and debt avalanche focusing on paying one debt off as quickly as possible while paying minimum payments on the remaining debts.
• Both methods require accelerated payments.
• The debt avalanche takes a simple math approach by focusing on the debt with the highest interest rate first and then working you way down regardless of balance.
• The debt snowball is centered on tackling the smallest debt by balance and then working your way up to the highest balance.

Debt Snowball:

Let’s look at this example and see how the debt snowball would be applied to this specific situation. The first step would be to gather all the debt information and list it out, as I have done below.

• $10,000 credit card debt at an interest rate of 18%, minimum payment of $225
• $2,000 car loan at an interest rate of 3% with a minimum payment of $75
• $20,000 student loan at an interest rate of 5% with a minimum payment of $425.
• $3,500 personal loan at an interest rate of 10% with a minimum payment of $70

Now that we have all the debt information listed, we can tackle the problem. Our current debt obligation by just paying the minimum payments totals $795 a month.

Now let’s say through budgeting and generating income through a side hustle, we have $1,000 available for paying off debt. Our standard month payout would like this:

• $2,000 Car Loan, payment of $280.00
• $3,500 personal loan, minimum payment of $70
• $10,000 credit card debt, minimum payment of $225
• $20,000 student loan, minimum payment of $425.

Once the car loan is paid off, you would apply the $280 that you were paying for the car and apply that to the next smallest loan; in this case, it would be the personal loan. It would look like:

• $3,500 personal loan, payment of $350
• $10,000 credit card debt, minimum payment of $225
• $20,000 student loan, minimum payment of $425.

If you keep stacking payments together until the snowball gets large enough to knock out all of your debt, you have successfully stopped drowning!

This strategy is great because it gives you a win early but you are not minimizing the amount of interest you are paying with this strategy.

Debt Avalanche:

Let’s look at the same scenario as above and see how the debt avalanche would work to stop us from drowning. It still starts with listing all debts out with their payment and interest rate information, but now we are going after the highest interest rate instead and don’t care about the balances. Our first-month payment structure would like

• $10,000 credit card debt at an interest rate of 18%, payment of $430
• $2,000 car loan at an interest rate of 3% with a minimum payment of $75
• $20,000 student loan at an interest rate of 5% with a minimum payment of $425.
• $3,500 personal loan at an interest rate of 10% with a minimum payment of $70

After the credit card has been paid off, we would apply the $430 to the personal loan because it has the second-highest interest rate. The example payout structure is listed below:

• $2,000 car loan at an interest rate of 3% with a minimum payment of $75
• $20,000 student loan at an interest rate of 5% with a minimum payment of $425.
• $3,500 personal loan at an interest rate of 10% with a minimum payment of $500

As you can see, this method reduces the amount of interest you pay over the long term by eliminating the highest interest payment first regardless of balance.

Summary:

When you are drowning in debt, it can feel very scary but it is up to us to get out of the water. Ultimately both of these strategies work, and I recommend whatever system you feel more comfortable with. I often tell people to use a hybrid approach and combine the methods. I think the psychology of winning is critical in making a change. The debt snowball lets you see progress even though you are not minimizing interest payments. But, who cares! When getting out of debt, the most important thing is making and following a plan to get out of it! But if you are disciplined and stick to it, your wallet will thank you for following through with the debt avalanche.

As always, you have so many options available to you. The most crucial step is always the next one. You got this!