Debt Payoff Methods
So last blog we began to think about debt payoff. Remember in our case we:
Are dealing with manageable debt i.e. we can pay off the minimums already.
We have an emergency fund in place.
We gathered our data and arranged it in order of importance.
We considered consolidating if it fitted in with our situation.
So now we can get to the main debt payoff methods.
A Note Of Inspiration
I always feel so excited an inspired when I think of this and when I watch people pull it off.
To go from a tangled web of stress and anxiety which just compounds worse and worse to picking everything apart, formalising it, spending energy working out how we function as people to work out our method and then just simply, enacting it.
Woof it does something to me!
The two methods, snowball and avalanche, appeal to different types of people. There's no right or wrong one in particular, although there is one which will save more money in the long run so we'll start with that.
The Debt Avalanche Method
1). You continue paying the minimums for all of your debts.
2). You put any extra money into the debt with the highest interest rate.
3). Once that is paid off you redirect that extra money (and the minimum you were paying to that debt also) towards the next highest rate debt.
This saves the most money because it pays off the debt which attracts the highest rate of interest so you’re paying the highest rate for the least amount of time. This is not necessarily the smallest debt and therefore not necessarily a quick pay off, so it could feel like not a lot is happening.
Psychologically then, the next method keeps the momentum going.
The Debt Snowball Method
1). You continue paying the minimums for all of your debts.
2). You put any extra money into the debt with the smallest balance.
3). Once that is paid off you redirect that extra money (and the minimum you were paying to that debt also) towards the next smallest balance.
This feels good because you're clearing the path and also, by the time you are hitting your biggest debt, the amount you're able to smash towards it will be as massive snowball of all of the previous minimums you were paying and any extra money.
The Mixed Method
Personal finance is personal. You do not have to follow either of these methods to a tee.
Of course, if one really appeals more than the other then go for it. If you've got no real opinion you just want to get going, then I'd be choosing the avalanche method but there is no harm at all in perhaps, starting with a smaller debt to get the ball rolling and then switching to your highest interest rate debt.
The key is not faffing by splitting between the debts. Both methods work best with a sharp focus so pay those minimums and then shovel all extra cash towards your single goal.
The Soft Method
This is imperative whichever method you choose, that shame and guilt have no place here - they won't get you anywhere.
What has happened has happened, we mustn't forget it, or ignore it, because this is all vital information for how not to end up there again - but it's not what will motivate us. What must motivate us is the deep, absolute knowledge, that we are worth the time and effort and we deserve to be comfortable.
Take time to celebrate when you do something well. Paying off a debt is fantastic yes, but how about, reading this post and daring to open up a spreadsheet for the first time? I'm celebrating you!
If you're feeling inspired right now - bloody do something!
Don't let this moment pass you by. I'm not saying you can solve everything this minute, but you can put plans and habits in place which will carry you through even when you're are deep, down in the shit.
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Loads of love,
Eleanor. xxx
