This is part 3 of the “Dig Yourself Out of Debt” Series, published every Thursday. Surfing old posts? You can catch up on Part 2 by clicking here, or view every post in this series by clicking here.

So far we’ve found out exactly what we owe, and hopefully freed up some extra cash. The next step is to begin actually paying off our debts as quickly as we can. This isn’t pretty if you want to do it quickly like I am, but if you’ve no real urgency and can handle being in debt for longer, then pace yourself. Just remember that the longer you take, the more it costs you in interest.

Reverse Snowballs, Avalanches and Snowflakes

No I haven’t gone mad, and Christmas hasn’t come early! Not in that sense, anyway.

Reverse Snowballing (aka Avalanching) is a method of debt repayment, and one that makes the most sense as you’ll see below. Snowflaking is a term for making micro-payments on top of what you’d planned if you find extra cash that you didn’t calculate having.

Consider this: If you find a fiver in the street, what is a better use of it? Buying you and your mate a Starbucks, or sending it to Barclaycard? Ultimately only you can decide what you’d rather do with it but I’d send it in as a snowflake on top of my snowball.

Time to Reverse Snowball

Continuing my imaginary friend example from Step 2, Selina has decided she has made all the changes she is willing to make in her life in terms of cracking her debt problem.

Her situation was not all that dire, and simple changes were sufficient to see her out of her spiral and into positive balance each month. You (and I) may need to make bigger sacrifices if we’re to dig ourselves out of our respective holes. Perhaps you’re luckier than Selina and I and your debt situation is smaller or less expensive. Either way, it’s fair to say that life would be more fun with no debt.

As a quick reminder, Selina made £480 from decluttering, and had £222 spare each month after paying all her bills and making the minimum debt repayments all round.

Step 1: Order Your Debts From Most Expensive Downwards

There are several thoughts on this but the bottom line is paying off your most expensive debts first, saves you cash in the long run. In Selina’s case her most expensive debt is her second credit card, charging her 27.9% on her £1,000 balance. Her other card followed with its £5,000 balance at 14.9%, and then finally her mortgage at 4%.

In Avalanching (or Reverse Snowballing), you pay off the most expensive debt first, then the next, then the next, trying to cut how much you give away in interest payments. In a traditional snowball, she’d by chance still pay off the £1,000 balance first, as it’s the smallest but if the interest rates were reversed in our example and she followed the traditional snowball method, she’d be keeping the more expensive debt hanging around while she concentrated on paying off the smaller balance.

While this feels good emotionally (it’s always good to see the back of a debt, and attacking the smaller one makes it happen quicker), it doesn’t make money sense. If you’re interested in the raw numbers of why, Trent @ The Simple Dollar worked it all out already with examples.

If you’re not all that interested in the why of the method, just order your debts from highest APR to lowest, and pay off the highest first. It’ll save you lots of money!

Step 2: Discount Your Mortgage

If you are not in arrears, then don’t count your mortgage. It’ll be the cheapest line of credit you have anyway, even though it (hopefully) has the largest balance outstanding. Mortgage Freedom comes long after Unsecured Debt Freedom.

Step 3: Throw Snowballs, From Top to Bottom

Once you’ve ordered your debts from highest APR to lowest, start paying off the most costly debt first. Selina paid £480 to Credit Card 2  in one go from the sale of her clutter, and then £222 every month on top of the minimum payment. With a couple of snowflakes she found in her budget, she paid the card off in just 2 months.

Her next card would take longer, but she also had an extra £50 a month to pay it off with as she was no longer making any payments to Credit Card 2 because it has a £0.00 balance.

This is where the reverse snowball analogy comes in, for those who were still wondering if I had lost my mind completely. As the snowball continues to roll down the hill (this is you paying off your debt), it gets bigger and bigger as it goes. It’s the same for your debt repayments: As you clear debts, your ability to make bigger and bigger payments increases.

Thanks to her snowball and some snowflakes, she cleared this card in just under a year.

The Power of Snowflakes

Don’t underestimate the power of making many small payments to your currently attacked debt. If you manage to find a spare £5 every two weeks, then you’ll have paid off an extra £130 on top of your other big payments each year.

Selina is now debt free – and you can be too!

Selina’s example is quite simple in terms of how many debts she had and how much she owed. But it serves as a great example as to how it is possible to get out of debt, and how quickly. It just takes dedication, time and belief in yourself.

Next week I’ll be looking into the reasons we end up in debt in the first place and how you can combat them.

Have you snowballed? Did reverse snowballing make more sense to you? How are you currently getting out of debt if you’ve already started on another method?

• The Importance of Redundancy Planning
• My Final Credit Card Payment Coming Due
• A Warm Welcome to BBC Radio Listeners
• A Fundamental Question
• Credit Card Analysis: From Hell to Heaven

A little over nine months ago (January 2009) when I was at the very bottom of my financial meltdown, I made a couple of resolves.

Firstly, I vowed I’d pay off all my debts within a year, and at the time this was a massive undertaking as I owed somewhere between £15,000 and £20,000 in unsecured loans and credit cards. I had been in debt to some degree or another for my entire adult life and I was tired of it. The thought of being able to break myself free of this was truly empowering.

Secondly, I vowed I’d save for a deposit to buy a house. Right now I am back living with my mum and step-dad. While it is comfortable and super-cheap, it is just not sustainable in the long term. I am after all, 26 years old and in need of my own space to continue to enjoy the rebirth of my financially-sensible self. On the flip side of that while my mum enjoys having me back home, I am a bit of a thorn in the side of my step-father which I totally understand: It has been quite a few decades since he’s had “children” in the house.

Do I Save to Buy?

Nine months ago the decision to buy my own house made sense on an abstract level. I’d rented for 3 years, thrown a considerable amount of money at someone else in doing so, and had nothing at the end to show for it. I lived paycheck to paycheck and got deeper and deeper into debt. Right there and then, the prospect of renting again did not seem exactly enticing.

The reason I was piling on the debt as some of you will have read wasn’t entirely my fault, but that didn’t change the perceived economics of it for me. I may as well have been spending the rent money on a mortgage payment instead and have something to show for my efforts.

I’ve thought long and hard about my decision to buy since, and come up with the following issues.

I need at least a 20% deposit to get a good rate.

A few years ago 100% mortgages (even 125% mortgages) were not uncommon. For those unfamiliar with the term, this means the bank would loan you the entire purchase price of the house outright with nothing down (in the case of 100%), or would give you the entire purchase price and then another 25% as cash on top in the latter case! Needless to say this turned into the banking credit crisis/global recession we are now all suffering, courtesy of valuation fraud, irresponsible lending, artificially high prices and lots of other reasons.

My Mortgage Advisor has pre-approved me for £154,000 (c. $255,000 USD) on my own salary.  20% of this is £30,800, or a years gross salary before overtime bonuses. That’s an awful lot of money.

House prices remain very high where I live.

Most areas in England have seen property prices fall considerably. Where I live in the cosy, relatively wealthy South East, things have not been so bad. Prices have dropped, but not to the same degree. The result therefore is, compared to the rest of the country, prices remain very high and (I posit) artificially inflated.

A 30%+ deposit would secure the very best rate.

A 20% down payment secures a good rate, but 30% or more secures the very very best. This difference could end up costing (or saving) me tens of thousands of pounds over the life of the mortgage. Except, assuming I manage to find something nice in this area for ‘only’ £154,000, that would take the required deposit up to at least £46,200.

Saving this will take 3-5 years

If I stay with my parents for between 3 and 5 years, I will have somewhere between the 20% and 40% deposit required. The problem therein, is staying with my parents for between 3 and 5 years. I know it makes sense to do it but I’m not sure I’d be welcome for that length of time. Realistically then we are talking significantly longer saving to reach the required level of funding with a ‘life on hold’ attitude to get there.

I would be spending outside my comfort zone

Interest rates are historically low right now, but they won’t stay there forever. Will I be able to afford my monthly mortgage payment when the interest rate goes up to 5%? 8%? 10%? How about 15% like it did in the 1980′s? When you load yourself up high at the beginning, a small change can tip you over. A 15% hike on a £1,200 a month repayment will be significantly more painful than one on say £500-600. Trent over at The Simple Dollar has written a couple of times about the same feeling.

I need to buy for much less than my approved maximum mortgage

What this means ultimately, is that to continue my sensible debt-free, financially secure future life, my mortgage needs to be considerably less than the maximum I know I can get. If I go all out, then for the entire term of the loan, I am going to be counting my pennies wondering when they might run out. I want to count pennies in a positive way, not in a paycheck to paycheck way.

That is a lot of issues and many of them reflect my new-found sense of requiring security in my finances. This list doesn’t even touch on the usual home-owner worries such as maintenance costs, breakdowns, insurances and many more. Get Rich Slowly (another financial blog) had a similar discussion.

Or Do I Save to Rent?

When you consider all those points, renting is incredibly simple in comparison. For a deposit (that usually equates to just one months rental payment) and one month in advance, I’d get a bigger property than I could likely afford if I tried to buy, and none of the hassle. I’d also keep my liquidity without tying it up in bricks and mortar.

Fixed Outgoings

I’d know well in advance what my monthly outgoings would be in terms of the actual physical property. Rental agreements are negotiated annually and are unlikely to vary by more than 2% in either direction in any given year and if my previous experience is anything to go by, don’t vary at all. This is very comforting to my newfound financial security complex.

Keep My Cash

If I remain with my parents for another 2 years, I can leave with £30-40,000 in the bank, with some effort. That is some serious operating capital in terms of my desire to look towards longer-term investments, bonds, the stock-market and a general healthy emergency and opportunity fund. Stick it for 3 years, and that could rise to £60,000.

No Maintenance Costs

If the boiler breaks in my rented apartment, it’ll cost me a phone-call to get the matter resolved. If I own my apartment, then the whole thing becomes my responsibility to fix. Storm damaged? Flooded? Broken into? All these are covered by a landlord. I realise Buildings and Contents Insurance will cover these but they themselves are an additional expenditure for homeownership that are not necessarily required under a rental.

Bad Area /  Street Decision?

If you’ve misjudged an area and find the crime rate high, or your neighbours a nightmare, then a letter and a few weeks can see you moving out and going somewhere better. You just do not have this kind of flexibility when you buy your own house.

But: No Security of Tenancy

There is always a downside to renting. The landlord with 2 or 6 months notice can decide he (or she) doesn’t want you as a tenant any longer and you have to move. Is this an acceptable risk, given the benefits?

And Nothing to Show For It

Finally we come back to my initial issue with renting – the fact that after possibly decades of giving someone else hundreds upon hundreds of pounds month in, month out, you still don’t own a single brick of the place. Is that a problem, long-term?

Have I Decided?

In short, no. I have no idea what to do.

I think that is part of the reason why I find myself angering quickly at the slightest thing of late. I’m grumpy, seem to have lost my sparkle for life and generally feel like I may be dipping into something I’ve rarely experienced before: depression.

I need to choose a path and then drive myself towards it. All the time I remain exactly where I am now, I will continue to feel like my life is without direction or purpose. My debt freedom goal continues to approach, and I really need to have made a decision as to what to do by then, as it will drive my saving and investment decisions. I don’t want to just feel like I’m rolling the dice to make a choice. I want it to be informed and well reasoned, and above all, right.

What would you do?

• Buying A House?
• Is Debt Worth It? Does It Matter?
• 6 Mistakes That Doubled The Price of My Car
• Dig Yourself Out of Debt: Spend Less Than You Earn
• Frugal Friday! 5 Easy Ways to Spend Less

Everyone should have what I call Total Situational Awareness where their money is concerned. If you are like me and either have or plan to have savings accounts all over the place chasing the best rates for your money, then it can be hard keeping on top of where your money is, and what it is doing.

Throw in the odd current account or 3 and credit card or 3, and things start to get really complicated.

If something is difficult then it’s just human nature – we’re unlikely to continue doing it. Money management therefore needs to be above all else: simple.

The old method was by statements, but this wasn’t very dynamic, and didn’t make projecting easy at all. It merely looked backwards. Spreadsheets came next, first in Excel and more recently in Google Documents.

Then Web 2.0 hit.

Mint.com

Folks in the USA have a cool service called Mint.com. It’s a total money manager or account aggregator, and once you get over the initial fear of giving some random company your login details for your banks and cards, you start to realise just how valuable their service is. It accesses all your accounts in the background and provides you with a complete overview of where you stand; All your debts, all your savings, what’s left in your current account, how much you’ve splurged on your credit cards, and how your investments are doing.

It negates the need to login to 3, 5, or 10+ different financial providers and instead gives you a one-screen view of where you are right now.

The downside of Mint? it doesn’t work for us in the UK.

You Have Mail

An email arrived this morning from a guy called Scott who’d seen my blog, noticed the target market, and wondered if I’d be interested in their service. Ordinarily I’m not too keen on unsolicited commercial contact, particularly from marketing companies, but to his credit he had clearly read my blog, knew what it was about, and bothered to find out my name and my circumstances before writing.

This wasn’t your average spam run, but a hand-crafted contact. I don’t mind those at all.

Kublax.com

Mint I can understand, after all money gets minted. But Kublax? What the heck is Kublax? I’ll let them explain:

The word Kublax is a combination of “Kuber” and “Laxmi”. In Indian mythology, Kuber is the god of wealth and Laxmi is the goddess of fortune, riches and splendour.

OK, that’s a bit random, but I can see it catching on with time. After all I thought ‘Ubuntu’ was a silly name for a Linux distribution, but it is now one of the most popular in the world.

It’s essentially a UK-version of Mint, and I have to say I’m thrilled. I’ve only just created an account so all I can offer right now is my first impressions, but rest-assured I’ll be revisiting this topic once I have played with it some more.

Interestingly, Kublax isn’t a 5-minutes-ago startup, either. It was one of the 2007 SeedCamp winners and officially launched September last year.

First Impressions

I always make a point – particularly with these kinds of services – of reading the Terms & Conditions and Privacy Policies. I’m pleased to report that I can’t find any surprises. It does what it says on the tin, they won’t sell you out, and won’t share your details with the mafia. UK Data Protection laws apply as I’m pleased to see their service is hosted in the United Kingdom (at Rackspace no less, for the geeks amongst us).

The signup process couldn’t be simpler. They don’t even want to know your name. Just supply an email address, a password, a bit of demographic information and off you go.

The site itself is clean, well presented, easy to use and above all fast. There’s a useful introduction video to show you the highlights, and more information available if you want to convince yourself a bit further.

When you first login, it prompts you to start adding accounts. I skipped this step – just to be difficult – and started browsing around the tabs instead. There is a lot of potential here if you use it right. You can set up budgets, budget alerts and compare your debt repayments (anonymously) to others around you to see if you’re paying more than you should be, as well as the more traditional side of money management of seeing where you stand, how you are doing and where you seem to be heading.

This is where they make their money. Kublax is free to use for the ordinary consumer. It’s essentially commission driven and their aim to sell you financial products you might find useful. I can live with that. It’s unlikely they’d know better what I need than I do, but if it makes the service free them I’m happy.

Their suggestions might surprise me down the road, and in general it’ll be useful for those who are not keen on spending their life researching finance like we PF bloggers do! If they make some commission out of me, who am I to complain if it fits my money goals?

Some Interesting Statistics

One of the services I find most interesting is the ability to compare your spending with other nearby individuals based on country region. Alternatively you can get an overview of the average spend of the entire country.

You can do this on aggregate as above, or to your own spending. Guys, do you spend more on cash withdrawals for impromptu nights out than the average? Girls, is your shoe budget getting out of hand? Kublax can tell you all this and more.

To Be Continued

This is just a first look at Kublax. I’m going to start using it and I’ll come back to it in a few weeks and months after putting it through its paces. If you’re cutting edge, come and sign up and we’ll do this together. If you’d like to play it safe and see if they empty my bank account before diving in, then keep checking back.

The Kublax Review is to be continued…

• Dig Yourself Out of Debt: Psychology 101
• 6 Mistakes That Doubled The Price of My Car
• Frugal Friday! 21st Century Haggling in 6 Steps
• The Long Term Cost
• Personal Recessions