Tired of paying your debt yet never making a dent?
Financial companies make sell you on how simple and safe loans and credit cards are. Fun fact, they are lining their own pockets with your money. After all, money is time and time is your life. It’s as if they are taking your life money.
You need to have a plan to tackle current debt and be aware of future debt.
We will walk through an example scenario that turns 10k of debt into 60k.
The Simple Steps to Debt Control
- Pay all minimums due!
- Save $750 dollars emergency fund
- Gather and monitor your debt
- Decide what to pay off first
- Schedule (or automate)
Important
1. You must pay the minimum of all debt obligations. Pay the minimum so you don’t fall further behind and get hit with credit issues.
2. You have to get started! Just do it!
Pay Minimum Debt and Establish A Safety Net
Assuming you are currently paying all your minimum debt obligations we can move on to making a dent in your debt.
The first step is simple, but it is not easy. When you turn this habit into a ritual you will be ahead of most. You’ve started your journey to financial freedom.
You must begin saving a safety net (aka. emergency fund). We prefer to call this a safety net and sometimes a cash cushion. Emergency fund has a scarcity mindset associated to it.
A safety net is just there for peace of mind. When things get tough, you can keep a clear and rational thought process through the difficult times.
Do not move forward until you have established your safety net. Nothing can throw you off your path faster than an unexpected expense.
We suggest $720. Enough to cover most expenses. An achievable goal if we look at it in pieces.
This is a starter safety net that keeps us safe while we begin breaking down our debt. Nothing worse than an unexpected expense to add to your debt. Compounding in reverse is a friend of no one.
In the future, we will want to grow this to keep us funded in worst case scenarios.
Set your safety cash cushion goal for completion in 3-6 months.
6 months = 24 weeks = $30 each week
6 months = 182 days = $4 a day
3 months = 24 weeks = $60 a week
3 months = 91 days = $8 a day
You’ll find we are big fans of setting measurable outcomes and working backwards to break it down. Small, measurable and specific goals help us to feel like we are making progress.
We live in a delayed gratification environment. It is no longer; see lion (stress), run from lion (reaction), no lion (relax). Today, we are constantly thinking — or shall I say worrying — about our unknowable futures.
We paralyze ourselves, overthinking and never taking action.
“Should I increase my 401k savings? Can I save money somehow? What’s the point, YOLO? I’m buying that new smartphone”
So, let’s try to change our mindset habits on saving for future you.
Breaking things down gives us clear steps and motivates us to keep going (see Seinfeld technique calendar).
We suggest setting up a new savings account at your bank — call it Safety Net (Cash Cushion is cool too). You can have as many savings accounts within your bank as needed (at most banks). We go into more detail in our automating savings — we will take full advantage of multiple savings to watch our goals grow!
Set up an automated weekly, or monthly, transfer a few days after your paycheck.
OK, we know our breakdown of how much we must save and we’ve automated the process.
On to the painful piece. The piece we all avoid… adding up our liabilities (aka. Debt).
Gather All Our Debt and Monitor it!
Figure out exactly how much debt we have. This can be as easy as pen and paper or as automated as using Mint or Personal Capital (as of this writing, we are not affiliated to these).
What you need to know.
- Total left on each loan.
- The interest % (APR).
- Minimum payment of each.
Write them down from largest to smallest loan size. Be sure to put the date because we need to check this monthly or quarterly. It’s the only way to see progress!
Now that we have an idea of how much we need to pay down, we need a payment game plan.
The Snowvalanche Debt Method
Yes, you heard that right. We’ve all heard the snowball and the avalanche debt repayment theories. We decided to buck the trend and mash them together when we tackled our debts.
Why snowvalanche?
- With snowball, we wanted to see the small wins to motivate ourselves to continue.
- With avalanche, we wanted to pay less interest over time.
- We wanted to continue adding to our safety net until we reached 3 – 6 months of expenses.
How to Snowvalanche
The rules of the snowvalanche debt method
- Always pay your minimums.
- Always pay extra to your smallest loan and your largest APR
- Split the extra cash either 50/50 or 75/25
- Roll the minimum payments into the payment of smaller debt (snowball)
- Don’t give up!
Now with our loans figured out, we shall begin to tackle them two at a time. And, yes, this is a very pretty model and most have much larger student loans. It’s easier to watch it work when it’s simplified this way.
Total Loans Collected
A full view of all our loans in one place. It may hurt, but it’s worth it
| LOAN TYPE | APR | TOTAL LOAN | MIN DUE | TOTAL INTEREST / MONTHS TO PAY OFF | Pay Extra |
| Credit Card | 16% | ($970) | $22 | $752.93 / 105 months | Yes |
| Credit Card | 12% | ($1,070) | $18 | $614.90 / 106 months | |
| Student Loan | 4% | ($8,000) | $106 | $2,463.40 / 282 months | |
| Refrigerator | 3% | ($330) | $15 | $9.85 / 23 months | |
| Laptop | 3% | ($150) | $15 | $1.10 / 11 months | Yes |
| TOTAL | ($10,520) | $176 | $3,842.18 | $200 |
Now that we have all our loans in one place, it’s time to start the grind. And I promise you this, it takes time! In the first few months, the task feels endless. Though, if you stick with it, the snowvalanche will start taking hold. You’ll see the progress and the motivation will start flying.
In this example, we are going to take $200 dollars we have slowly built up with limiting our expenses throughout the month. During our emergency savings phase, we often find extra expenses we can stop spending for the good of future us.
So with our $200 a month, let’s split that between our lowest loan and our highest loan APR.
First Month of Payments
$50 to highest APR and $150 to lowest overall loan amount. And look, we already paid off our first loan — the laptop! So, we take that $15 minimum from the loan we just closed and roll it into our $150. We now have $215 to pay the other loans. Snowball!
| LOAN TYPE | APR | TOTAL | ADDITION |
| Credit Card A | 16% | ($920) | $50 |
| Credit Card B | 12% | ($1,070) | |
| Student Loan | 4% | ($8,000) | |
| Refrigerator | 3% | ($330) | |
| $150 | |||
| TOTAL | ($10,320) | $200 |
Third Month of Payments
So we’ve knocked off our first two loans! Congrats. Our $200 rolled into $215 and now we have $240 to finish off our next loans.
| LOAN TYPE | APR | TOTAL | ADDITION |
| Credit Card A | 16% | ($820) | $50 |
| Credit Card B | 12% | ($1,070) | |
| Student Loan | 4% | ($8,000) | |
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| $165 |
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| |
| TOTAL | ($9,890) | $215 |
Eighth Month of Payments
Yes, we’ve forwarded to month 8. Look at that total! Almost $1500 knocked off our total. Now, we’ve had to make a switch and we are paying the larger amount on the highest APR but, fun fact, it’s also the lowest overall loan amount. Snowvalanche in action! So, pay the larger amount here and keep chipping away at the next highest APR.
| LOAN TYPE | APR | TOTAL | ADDITION |
| |
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| $180 |
| Credit Card B | 12% | ($1,010) | $60 |
| Student Loan | 4% | ($8,000) | |
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| TOTAL | ($9,010) | $240 |
Thirteenth Month of Payments
Congrats! It’s been a year. (I’m not sure why I’m so proud of this made up persons loans. It still feels good.) At this point, we’ve knocked off four of our loans and are now focusing on our education — which is considered by the credit beurau as ‘good debt’ which is a nice win for us.
| LOAN TYPE | APR | TOTAL | ADDITION |
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| $202 |
| Student Loan | 4% | ($7,940) | $60 |
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| TOTAL | ($7,940) | $262 |
Two Years and Four Months of Payments
There we have it! A made up loan paid off. I hope this person is happy, I did this for them. Bonus, we now have $386 dollars. Please do not take this money and filter it in to your monthly spending.
| LOAN TYPE | APR | TOTAL | ADDITION |
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| |
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| $280 + 106 |
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| TOTAL | ($0) | $386 |
What to Do with All Our Extra Money
Put this extra $386 away every month for 10 years in a simple ETF and you’ll have $64,716.65.
Yup, from ($10,000) in debt to $64,000 in savings in twelve years!
Everything about finance is slow and steady. But the power of compounding is a miracle in itself. We evolved in a instant gratification world (run from lion) and we now live in a delayed gratification world (save for retirement).
It’s ok if it feels slow and painful, every extra dollar you can throw will help future you.
You can sacrifice today for your future, but don’t sacrifice your future for today.
Now, it’s painful today to make those payments, but it’s well worth it.
One way to alleviate that pain is to remove yourself from the process. That’s right, let’s automate. It is the 21st century after all.
Please head over to our second phase of a wealthy mindset.
