How to pay-off debt with snow metaphors
Last week, we had the first snowfall of the winter. You know what that makes me think about...Debt repayment. Stay with me, and I’ll make the connection very quickly.
Every time it snows for the first time, everyone is surprised! It’s like, we don't remember what snow is and that it means that it will make it longer for us to reach our destination. Sometimes those memories of winter can be happy ones. Most of the time, they are not. Especially when you are used to warm climates. Ahh Barbados, anyone?!
When we get into debt, sometimes we are surprised, we don’t remember how it got there, and we know that it will mean it will take longer for us to reach our financial goals.
When living in colder climates, you must know how you want to deal with the snow. This is similar to living with debt, you must know how you want to deal with repayment.
The first step in debt repayment is to make a list of ALL your debts. Student loans, Credit card debts, Car loans, Lines of Credit etc. Write them down along with their interest rates, balances, and minimum payments.
The second step is to negotiate lower rates where you can - by asking the credit card company directly or by consolidating your loans. This is key - do not put any new debts added to the debt you are trying to pay off. This will only lengthen the time it will take you to get debt-free.
The third step is to forgive yourself for any ill feelings you have from getting into this debt in the first place. Thank the debt for helping you with whatever situation led you to it, and believe that you made the right choice. It may be helpful to write your forgiveness statement on a piece of paper, light a candle, thank your debt and burn that paper down.
Now you are ready to deal with the snow…I mean, pick a debt repayment strategy. There are three popular methods: Debt Avalanche, Debt Snowball & Debt Snowflake.
Debt avalanche - Highest interest rate to lowest.
The debt avalanche strategy is about paying off your most expensive debt first (the debt charging you the highest interest rate) while continuing to pay the minimum payments on the rest of your debts.
With the list of your debts:
Put them in order from highest interest rate to lowest interest rate. If two debts have a similar interest rate, put the one with the smaller outstanding balance higher up on the list.
Keep paying all the minimum payments on all your debts (otherwise, you’ll get hit with late fees and maybe even a hit to your credit score).
Once that first debt is paid off, you would then divert the money you originally allocated for that debt toward your second most expensive debt. That means the total amount of money you’re putting toward all your debt doesn’t change every month.
Keep going until you have paid off the debts that have an interest rate greater than 5%. But for the debts with interest rates under 5%, keep paying the minimum. Once you get to that point, it’s better to put your extra money toward investing instead.
For a math-loving nerd like me, this is the strategy I used to pay down my student loans and line of credit. Most financial experts like this strategy because it will save you the most money in the long run by paying the least interest. The downside of the debt avalanche method: Getting rid of that first debt usually takes a while, especially if your balances are high. You might have a long ass wait between each “I paid one off!” celebration.
Debt snowball - lowest outstanding balance to highest.
The debt snowball method works the same as the debt avalanche method, with one difference: Instead of putting your debts in order from highest interest rate to lowest, you order them from smallest outstanding balance to largest. Then follow the rest of the steps the same way.
Psychologically, once that first debt is paid off, you'll be able to get an “I paid one off!” celebration fairly quickly. This success early on, and the endorphins they bring, will create momentum and motivate you to pay off the rest of your debts. You get to celebrate your wins sooner which may allow you to stick to your debt repayment plan with ease.
The downside of the debt snowball: This method doesn’t reduce your interest payments as quickly as the debt avalanche method, so you’ll likely end up paying more overall. Also, it may take you longer to begin your investment journey, as high-interest-rate debt should be paid off before you start investing.
Debt snowflake - put found money to your highest priority debt
The debt snowflake strategy is one that you use in conjunction with the debt avalanche or debt snowball methods. The debt snowflake strategy involves you adding amounts of "found money" onto your priority debt to accelerate your debt-payoff timeline.
Your highest priority debt can be the one with the highest interest rate (debt avalanche), the lowest outstanding balance (debt snowball) or the one you want to kick to the curb the fastest (bye Felicia!).
Use the money you get from a bonus, a raise, a promotion, a tax refund or even make more money. Side hustles can come in great here. As a result, those tiny snowflakes add up to a mountain of snow.
So … which one’s better for paying off that debt?
Ultimately, you need to decide. You could “avalanche” your payments to pay less in interest, you could “snowball” your payments to keep motivation high, or you could add up the weight of those tiny “snowflakes” to pay to get out of debt faster.
There is no "right" way to pay down debt. If the route you take propels you to become a badass investor, then that's the "right" route for you to take.
