By elmads

Introduction

I have been a proponent of not taking on debt, because debt has been one of the root of all financial problems for most people over a long period of time.

Don’t get me wrong, I am not blind nor deaf to the fact that there are instances when individuals resort to acquiring debt. This is because of their dire need to finance their basic necessities of life due to the hardships of life.

This is the truth of life, even if financial education and financial literacy are being spread around the world, there will always be individual life circumstances that cannot be applied with just having the knowledge of handling our own finances.

There are a lot of reasons why people go into debt, which I have tackled in my blog titled “Debt is not Good, nor Evil”.

Nevertheless, I am still optimistic that if a person is keen and motivated to get out from the shackles of debt, then he/she will definitely succeed.

An individual may have acquired tons of debt due to their own personal reasons, but repaying debt and getting out of debt is a personal decision and endeavour that a person will never regret in his/her lifetime. It is a debt free journey towards a debt free life.

This journey is not a straight path, it will take people into the extremes, their patience will be pushed further than they can possibly imagine, their consistency will be shaken, and their eagerness will be tested. The larger the debt they have, the harder it will be for them, but the joy and fulfilment once they repay all of their debts cannot be expressed by mere words.

There are two popular and basic steps that we can take in order to attain a debt free life. It is through the Debt Snowball and the Debt Avalanche methods.

Debt Snowball

This strategy focuses on the size of our debt balance. We focus on paying our smallest debt, up until we reach the largest debt and pay everything completely.

Below is a simple infographic explanation on how to pay our debts via the debt snowball

There are people who disagree with it. They say that this debt repayment method takes a long-time before all debts can be paid. They argue that why start with the smallest debt? why not pay the largest debt first? and that by following this method, people who do this will surely pay a lot more in interests on their debt.

These questions and statements are valid in their own right because the faster we repay our debts and if we start with the largest one, the quicker we will reach a debt free life, and also pay less on interest.

Nevertheless, there’s one reason why debt snowball is very popular and most advised strategy. It is sustainable and most of all it considers a person’s emotions.

We have to keep in mind that most people who are in the deep mud of debt are the ones who do not know how to handle money because no one taught them about it, and they are also the ones who mishandles money due to their behaviour.

Just imagine this analogy. A person who doesn’t do any physical exercises since his physical education class in his secondary level of schooling. This person suddenly though that he just wants to be in shape, have a strong cardio-pulmonary endurance and a toned physique.

What do you think will it take for that person to reach his/her goal? It is a widely known information that at the least, this person needs to start to have a proper, consistent and disciplined exercise and diet regimen. But, what’s the main thing that he/she will need to change? It is actually his/her lifestyle, mindset and behaviour.

This is exactly the same with people who have bad money management habits. They know that they are poor with it, but are willing to change themselves just to be able to get out of debt and start their financial lives anew. This is where the debt snowball strategy comes in, its main objective is to make you pay your debts, but its main goal is to help you stay motivated and consistent. It focuses on both the mental, emotional and financial aspects of the debt free journey.

Debt snowball is called snowball because we start at the smallest debt up until we can pay the next smallest up until to the largest. It is like a snowball that from a small snowball it tends to get larger the more it roll downs the mountain.

The following bellow are the simple steps for the debt snowball method:

1. List all of your debts from smallest to largest
2. Make all minimum payments on all debt, except the smallest one
3. Pay extra on your smallest debt until you pay it off
4. Pay the next smallest debt once the previous has been paid off
5. Repeat this process until all of your debts have been cleared

Below is an infographic example on how to do the debt snowball with a real life example. 👇👇👇

The Disadvantage of Debt Snowball:

• It takes a longer time to completely pay our debts.
• We will most likely pay more on the interest of our debts, because our focus is on the size of debt not on the interest payment rates.

Debt snowball is a psychological reward system. It brings hope to the people who thinks they will not be able to completely pay of their debt.

The reason behind paying of the smaller debt is to give us a sense of fulfilment for every debt that we pay successfully. The fact that we pay off a small debt first is already a micro success for us. It gives motivation, and place an imprint in our minds that a debt free life is actually possible.

Debt Avalanche

As the name implies, “Avalanche”, it already sounds a strong and hardcore strategy to pay off our debts. Debt Avalanche focuses not on the size of our debt, but the debt with the highest interest rates.

Remember that with debt we have an interest amount to pay. This is how banks make money through lending. In exchange for them to lend us money, we need to pay interest on the money that they lent us.

Debt avalanche is called avalanche because we work from the top interest bearing debt to the least. It is literally an avalanche of snow rushing down the mountain. Here are the simple steps we follow to be able to do this method.

1.) List all of your debts from the largest to smallest interest rates.

2.) Make the minimum payments on all debts, except the highest interest rate

3.) Focus your resources on the highest interest rate debt until it gets fully paid

4.) Pay the next highest interest debt once the previous one has been paid off

5.) Never give up and never surrender until all of your debts have been cleared

The goal of this debt repayment strategy is to pay less on the interest of debt. It doesn’t care about the debt size, because the debt amount (Principal) doesn’t become increase or decrease anyway, it just stays the same. Whereas, with interest, as long as we have not paid the whole amount (Principal), we’ll still keep on paying that interest on the current debt balance.

Below is the infographics on how to do the debt avalanche method.

Disadvantage:

• We may quickly loose motivation because we will not be seeing frequent wins. Less fulfilling.
• Doesn’t take into account our emotions

Which One Is The Best?

The answer for this will always depend on you. Be self-aware and ask these questions:

1. Do I know my priorities?
2. Do I have a good control of my emotions? or do my emotions control me?
3. Am I completely motivated?

These questions will be able to guide you as to which one will be applicable for you.

On the one hand, Debt Snowball focuses more on your emotions, it gives you frequent fullfillment and success, but it takes a longer time for you to pay off your debts.

On the other hand, Debt Avalanche focuses on quick debt repayment and less interest to be paid. This is in my own opinion has a more hands on approach with personal finance, as you have the complete control of your money. Plus, the more money you will be able to save by paying less on interests.

Below is a summary infographics of the pros and cons of the two methods.

 To Sum It Up

Deciding and takin action to have a debt free life is one of the best decisions that a financially indebted person could ever take.

The resolve to get out from the mud of debt and start building a strong financial foundation for yourself and your family will help you see the light at the end of the tunnel.

Debt is like an unstable land, it destroys any structure built upon it. Sure we can force to still construct a house or a building on that land, but the foundations will never always be strong enough to weather the storms of life. It’ll crumble down not because of the materials used to build the home, but because the land wasn’t a suitable area to build a home in the first place.

“You can’t be in debt and win. It doesn’t work”

-Dave Ramsey

Removing our debt into our names will always be one of the priorities in our financial lives. Freedom from debt is worth more than any money you can earn.

Never lose Sight and Never lose Faith.😁❤️‍🔥

Knowledge is my Sword and Patience is my Shield,

elmads

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.