Are you wanting to pay down your debt? Does it seem impossible?
IT IS NOT IMPOSSIBLE! YOU CAN DO IT!
Chances are, your debt isn’t even that bad. According to Experian, the average American has $6,600 in credit card debt. Even if you have double that in credit card debt, it is possible to pay it off. You may not pay it all off by tomorrow, but it can be paid off.
Paying off debt is a journey, you just have to be willing to drive. Your first stop? This Brilliantly Frugal debt calculator.
This freebie will be helpful in calculating your debt. It will also give you a snapshot of your payoff schedule under your current circumstances.
DOWNLOAD IT HERE
When I first used the debt calculator, I became very discouraged. I have a lot of debt and it made it seem like I would NEVER get out of the hole.
WHAT I FORGOT:
The debt calculator does not take into account work bonuses, raises, promotions, side hustles, income tax returns, inheritances, and budget adjustments.
I had to remind myself that the longer my accounts are open and in good standing actually HELPS my credit score (Read the Ultimate Guide here).
LET’S GET STARTED!
There are two different strategies for paying off debt; Avalanche (Highest Interest First, a favorite of CPAs) and Snowball (Lowest BALANCE first, my personal favorite).
Why Snowball is the best!
When using the Snowball method you start by paying off your account with the Lowest Balance First. When you finish paying off that account, you take the payment you were making on that and add it to the next lowest balance. You Snowball it up! This is great because you get instant gratification when you pay off a small balance loan quickly. Plus you get to put bigger and bigger payments down towards your debt.
Let’s say my car payment is $300 per month and I only owe $1,000.
My student loan payment is $100 per month and I owe $5,000.
My credit card payment is $40 per month and I owe $7,000.
I will put add any extra money that I have to my car payment to pay off my car FIRST.
Once my car is paid off, I will start paying $400 ($300 car payment + $100 student loan payment) towards my student loan.
Once my student loan is paid off, I will pay $440 ($300 car payment + $100 student loan payment $40 credit card payment) towards my credit card.
You keep rolling your payments into a bigger snowball as you pay off debt until you have a GIANT SNOWBALL to tackle your debt. Snowball gives you the benefit of the snowball effect, but you may end up paying more interest over time than if you were using the Avalanche system.
BRILLIANTLY FRUGAL TIP:
If you have two debts that are close to the same balance but have very different interest rates, you may see a big difference in the total interest that you pay if you change the order of the two accounts so that you pay the account with the higher interest rate first. In that case, use the Order Entered in the Table strategy in the Brilliantly Frugal Debt Payoff Calculator.
Why Avalanche Saves You More Money
When you use the Avalanche system, you pay off the account with the Highest Interest First. This means that you will accrue and pay less interest in the long run. In other words, you start at the top of the mountain with the worst interest rate account and then move down the mountain to the next highest interest rate account.
Let’s say my car payment has $300 per month and I have a 2.9% interest rate.
My student loan payment is $100 per month and I have a 5.8% interest rate.
My credit card payment is $40 per month and I have a 19.99% interest rate.
I will put add any extra money that I have to my credit card payment to pay off my credit card FIRST.
Once my credit card is paid off, I will start paying $140 ($100 student loan payment + $40 credit card payment) towards my student loan.
Once my student loan is paid off, I will pay $440 ($300 car payment + $100 student loan payment $40 credit card payment) towards my car payment.
You keep going down the mountain faster and faster with the added money from your paid off accounts. Avalanche will save you more in interest in the long run, but you won’t get the same instant gratification that you do with the Snowball method.
BRILLIANTLY FRUGAL TIP:
If you have two accounts that are very similar in interest rate, but one balance is lower than the other, switch the order so that you pay the lower balance account first. This way you get that gratification of paying off the debt faster.
MAKE A DECISION
Decide whether Snowball or Avalanche will work best for you. Avalanche is sometimes the best decision for saving money in the long run. It was not the right fit for me though. When I started working on paying down my debt, I had high balances. If I had started on my highest interest rate account first, it would have taken me 5 years before I paid off my first account. That was too long for me to wait to see my reward. Instead, I decided to start with my credit card account which had 0% interest at the time and an $800 balance. I was able to pay it off it just three months and I felt great about paying it off! It helped me stay motivated to work towards paying off one of my student loans.
Once you’ve decided which method will work best for you,
You should redo your calculator at least once a year. So many things happen in a year that can change the debt calculator. Your pay will change, your budgets will change, and your balances will change. It is also possible that your minimum payments may change, and your interest rates may even change. Take the time to redo the spreadsheet and see where you are. Don’t forget to celebrate your progress, and evaluate how well you are doing.
Paying off debt is a journey. Make sure to take time to look back on where you’ve been. Stay focused, keep working, and don’t give up.
DO NOT GET DISCOURAGED!
THIS IS NOT FOREVER!
YOU CAN DO IT!