I read an interesting article by Consumerism Commentary last week (hat-tip to The Simple Dollar) on "the Debt Avalanche":
If you have a certain amount of money available to pay off a portion
of your debt each month, even if that certain amount changes, there is
a mathematically correct way of paying off that debt. You can call this
approach the Debt Avalanche. It is similar to Dave Ramsey’s popular “debt snowball” method, with one small but important detail: With the Debt Avalanche you will pay off your debt faster and pay less total interest to banks and lenders.The simple calculation for the Debt Avalanche
requires only the interest rates for each debt account. This assumes
that all debt accounts have the same tax liability, but if that’s not
the case, determine your interest rate after taxes for this calculation.Read full article.
When my husband and I got married, we purposed to stay out of debt if at all possible while he went through law school. Now that law school is behind us and we’ve avoided debt this long, we’re really determined to completely avoid debt in every way, shape, and form for the rest of our lives.
We’ve sought to debt-proof ourselves through a number of means: living on less than we make; living on a strict budget; building a six-month emergency fund; communicating openly and honestly as a husband and wife about finances; and investing in good life, health, and disability insurance. Only God knows whether we’ll be able to completely avoid debt our entire lives, but we are quite determined to do everything we can to keep from being enslaved to it.
While you all well know that I am a huge Dave Ramsey fan, since I’ve never been in debt, I personally can’t say what works or doesn’t work with regards to getting out of debt. And I don’t necessarily think the same exact steps will work 100% perfectly for each and every person and situation.
So, what do you think? I know a number of you readers are seeking to get out of debt and I’d love to hear what is working for you. Do you think that Dave Ramsey’s "Debt Snowball" method is the method for debt reduction? Or would you agree more with Consumerism Commentary’s proposed "Debt Avalanche"? What has worked for you?
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Mommyof2boyz mentioned something very important – minimum payments due. Assuming your working on credit debt here, you’re going to have a monthly minimum on each one that’s only going to go down very slowly as you pay down the accounts. Each account still open is going to require a certain minimum that you *have* to meet each month, and if something big comes up that eats into your extra payments, you’ve still got ALL those minimums to meet. Paying off the snowball way gets some of those minimum payments out of the way more quickly. Then, if something comes up for the month and you don’t want to dip into your emergency fund (or it’s bigger than your emergency fund!) you can back off the extra payments, but you don’t have to worry so much, because you’ve now got fewer minimums to meet than you did when you started. I am SO glad that I only have two minimums to meet each month now, rather than 5!
I highly recommend using that debt calculator, it’s very simple to use and easy to understand. And if your debts don’t have widely varying rates, the differences in the two methods are probably not as big as you might think they are.
Tammy and Heather: It’s Maria @ 12:30pm that has the 0% interest rate on credit cards (I wish!) not me! I paid off my house years ago!!!
Crystal,
This is a little off topic, but since you touched on it in your post, I was wondering if sometime you could share what you are using for disability insurance. I’m quite concerned about this since I’m a single mom. There is no one who *could* go to work should I become disabled. Thanks!
Just a thought on this topic…what about this view? http://finance.yahoo.com/expert/article/yourlife/37252 Perhaps it might be a good idea to keep things like mortgages and student loans because of the tax benefits on interest paid. Meanwhile, invest the extra money that you would have been paying in a “snowball” or “avalanche”. Considering that, over time, the markets have earned 9% yearly. I’m not saying there is anything wrong with paying off debt early, just wondering if this opposing view has merit. Of course, you’d still want to get rid of any credit card debt and vehicle loans ASAP.
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Money Saving Mom here: So, to reverse that, you’d borrow on your house to invest money in the stock market or mutual funds? Because basically that’s what you’re doing when you keep the debt bondage on your home in order to invest money.
But if the financial experts are recommending this, that would explain why most people nowadays are struggling so much financially.
By the way, I just have to say it: you really need to read what Dave Ramsey has to say on this.
I don’t know about you, but I personally like the benefits of owing no man anything. It sure is F-R-E-E-D-O-M!!
I think it is true that if you were THAT hung up on the numbers and interest rates, then you wouldn’t have gone into debt in the first place. But I also believe in a heart-change and someone who didn’t quite pay close attention to the “numbers” can have a change of heart and really learn and grow and want to pay more attention to the numbers as they get out of debt.
It looks as if most of what can be said has been said in the previous posts. . .I know I’m preaching to the choir here, but one thing I did want to mention is that paying off the smallest debt first doesn’t “eliminate” a payment from your monthly budget, but you keep paying that same amount onto the next highest debt. (Now, I know most everyone understands this, but I just didn’t read about it in the posts). So you don’t “free up” cash each month by paying that debt off because you just keep paying that payment onto the next highest debt, and so on, and so on, until you knock out all your debts. I think, in that way, you aren’t wasting too much money buy doing the snowball because you are able to put the big “snowball-ed” amount onto that high interest debt (depending on what order it comes in)which will pay it off quicker. Also, according to the “gazelle intense” approach, you throw anything and everything extra you can at that debt. That alone could hasten your debt reduction dramatically. I know a couple who only could pay $.92 extra onto a debt one month, but by golly (yes, I just said by golly), that’s what they did with that $.92!!! THAT is being motivated and gazelle intense!!
Anyway, I really appreciate this site and love the daily motivation it gives me to stay on my written budget. We are a family of 6 and have just under $12,000 to pay off(not including the mortgage). Seems like a drop in the bucket compared to some others’ debt, but with a family of 6 living on 55,000 a year, it sure is slow-going. Thanks for the motivation!!!!
I’m a law student and I’m interested to know how you made it through with no loans at all. Did you have to work to support your husband?
Rolling the debt around ruins your credit score for later on down the road, when say, you want to BUY a car instead of leasing. We called our cards and lowered the interest rates, and the highest one we negotiated a set price of paying it off within two months with the company. They took a couple thousand off of the balance and settled it with us. It didn’t hurt our credit at all. After two years of paying what we could on all of them, we are credit card debt free. I WILL say this, CITIBANK is THE WORST one out there. Beware of their offers, there are always strings attanched. Cutting those cards was SO liberating and freeing when they were paid off!!! I loved calling the companies and canceling them. I say pay off the highest debt first, but if there is a smaller one you can completely eliminate, then by all means do it.
My Boaz’s Ruth:
I’m not sure how much you had in your emergency fund, but I’d really caution against everyone just cashing it all in. Yes, it does not make sense to have a massive amount of savings in the bank at 2-3% interest while having credit debt many times that rate. But if you don’t have a financial cushion, you could end up right back in the hole.
We recently had to put about $700 of work into both our cars. If I had not had money in the bank to cover that, almost the whole amount would have gone on the credit card, and my credit reduction would have gone kablooey. I was SO thankful to have that money in place! I even did a Frugal Friday post on it the following Friday.
Moral is, don’t keep tons in savings when you’ve got debt, but do keep some.
And I can’t wait until we have the debt paid down enough to start putting lots in savings – I love having savings!
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