Attack Mindset: Two Ways To Quickly Pay Down Debt - Smart Money Seed

1/3/18

Attack Mindset: Two Ways To Quickly Pay Down Debt


Nearly everybody in the world will be faced with some form of debt over the course of their lives. This can range from those pesky student loans you accrued during your four (or five) glorious years in college to monumental purchases like a car/house. Regardless of the type of debt, one thing remains true: you’re going to owe some money-and some interest to boot!

The topic of debt can incite fear in the bravest of us, especially when it comes to these massive purchases that are the normal in today’s society. Smart Money Seed squad, fear not; I’ve dialed up a few methods that you can use to quickly attack those loans and be one step closer to living a debt-free life!

Before I dive into a few ways to manage your debt, a few ground rules:
   
  • No matter how many loans you are paying at once, these rules will not work unless you are AT LEAST paying the minimum amount owed on your loans every month. This is paramount to success as you'll incur needless penalties & added interest by not diverting funds to an existing balance.
  • Never take on debt you cannot manage. I’ve seen lives crippled due to unnecessary debt (read: maxing out credit cards for fun) and it is a recipe for disaster. Always have a plan to tackle your loans-you will thank yourself in the long run.
  • PAY YOUR CREDIT CARD BILL EVERY MONTH IN FULL. Did the CAPS drive this home? Good. The highest interest rates across the industry come from the banks that prey on the unknowing-don’t let this be you!

Method One: Snowball Method

The first method I’ll explain to pay off some of those existing loans is simply named the snowball method. This is quite a popular way to manage paying your loan balances because it provides a sense of completion as you go, especially for those of us that have a wide variety of loans. 

The snowball method boils down to diverting all remaining funds to the loan with the lowest balance once all minimum amounts owed have been paid. I’ll give you an example below.

Let’s say Brutus the Buckeye settled down and is living the suburban lifestyle. Brutus has three existing loans at the moment-a student loan, a car loan & a mortgage on his condo. He has $2000/month that he can comfortably pay on his loans, while the loan structure looks like this:

Loan
Balance
Min. Payment
Interest Rate
Car
$15,000
$300
4.00%
School
$40,000
$100
6.50%
Condo
$75,000
$800
2.99%

Using the snowball method, Brutus would initially pay $1200 to clear the minimum payment on his loans. He’d then take the remaining $800 from the original $2000 & throw all of that money at his car loan. This would pay Brutus’ smallest balance off in the fastest manner while not accruing additional debt from penalties/interest. Once he has fully paid the smallest balance, he would then move on to pay the balance on his student loans before continuing onto his mortgage.

While not the method that will save you the most money over the long-term, the snowball method finds value on the mental side of the house. Debt can be a terrifying monster for anybody and paying off that smallest loan can be a huge momentum builder in the pursuit of ultimately being debt-free. All in all, the snowball method accomplishes its goal of boosting your psyche while getting your balances paid down.

Method Two: Avalanche Method

Getting that psychological boost may not be enough for those of us that are lucky enough to be straddled with hardcore debt. We need to find the way to save the most money while getting these loans paid FAST. Say no more: the avalanche method is going to be our solution.

The avalanche method consists of using your remaining money to pay the loan with the highest interest rate after taking care of the minimum amount owed on all exiting balances. To explain this, let’s take another look at our example:

Loan
Balance
Min. Payment
Interest Rate
Car
$15,000
$300
4.00%
School
$40,000
$100
6.50%
Condo
$75,000
$800
2.99%

Brutus went ahead and took care of the minimum payments, so he’s got the same $800 to play with when deciding which loan to choose. In this scenario, Brutus would pay his
student loan first rather than the car loan because he wants to accrue the least interest possible. By paying his student loans first, he ultimately avoids paying more interest and in turn, more debt. While sacrificing initial satisfaction for long-term savings, Brutus can drive home one happy Buckeye.

What’s Right For You?

When deciding how you are going to tackle your debt, the snowball and avalanche methods are excellent tools in your belt for success. Each method has its own merits; deciding which to utilize is strictly on a person-by-person basis. If you value  those small victories (especially those with 3+ loans), the snowball method can be the boost you need to pay off all your remaining debt. Meanwhile, the avalanche method can save you money long-term while effectively relieving your financial stress.

In my next article, I’ll be diving into how I recently paid my student loans off and the methods I use when managing my specific debt. Until then, evaluate how you are currently managing what you owe. You may find that utilizing one of these proven methods could save you hundreds to thousands of dollars over the long run!

Happy savings,

Ty

No comments:

Post a Comment