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?