Stocks and Cents

Destroy your debt

Destroy Debt - Courtesy of By all hands volunteer photobank

Destroy Debt – Courtesy of By all hands volunteer photobank

Screw debt.  Seriously, screw it!  Who needs it?  I mean, yes, most people need it to buy homes and cars, etc, but still, screw it!  You all know I hate debt.  I mean seriously, I loathe it.  You also know that I’m doing everything I can to pay mine off early.  Because seriously, who needs or wants debt?  But just hating debt doesn’t get me or you where we need to be.  We’ve gotta figure out the best way to actually fight it off for good.  Recently, I got turned on to the website, which has a wholly unsafe sounding site link but I assure you is 100% real.  Seriously, I swear it.

Anyway, this site allows for you to input all of your loans, the interest rates and the payments, and then specify how much a month more than the minimum you’d like to pay.  It then tells you exactly how much to pay on each loan, each month, until they’re paid off using two different methods: the debt avalanche and the dent snowball.   Let me explain.

Debt Avalanche: This is the more mathematically sound of the two methods.  Under this method, calculates what you need to do in order to pay off your highest interest rate loan first, followed by the next highest, and so on and so on.  This method will ultimately lead you to save the most on your interest payments, cutting down the principal of the highest interest loans before they can take too much money from you.  The problem here is that it’s not terribly satisfying.  Your biggest loan might also have the highest interest rate, which means you might not see any real momentum in your debt destruction question.  This makes this a bit more difficult but in the long run, much simpler.

Debt Snowball: Similar to above, this method pays the smallest loan off first, rather than the highest interest rate.  Basically, if you have four loans, each with a value of $1,000, $2,000, $3,000 and $4,000 respectively, you’d try to knock off the $1,000 loan first.  By doing this, you’ll start to see tangible results in your debt destruction process and feel like you’re actually accomplishing something.  You’ll go smallest to largest and by the time you get to your last loan, it shouldn’t take you too long to beat it into submission.

Both of these methods have their own merits.  The debt avalanche obviously saves you the most money in the long run.  The problem is, you can feel like you’re banging your head against a brick wall for most of it!  It just takes too damn long.  The debt snowball actually feels like you’re accomplishing something.  With every small loan you knock off, you know you’re getting closer to your goal.

Personally, I’m using the debt avalanche.  The numbers just don’t lie.  If you have time, check out the site and see how soon you could pay off your debt.  It’s at least worth a look!

4 Responses to Destroy your debt

  1. I usually recommend the debt snowball for most people since they need to see they are making progress. Eventually the light goes off and they realize they could have saved more money by going with the debt avalanche. After we talk about it, they agree that they needed the motivation of a smaller balance/paid off card to be successful.

    • Brian

      I don’t disagree one bit Jon. It’s tough to get motivated and even tougher to build a good habit. The debt snowball definitely helps with both.

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