Monday, April 7, 2014

How I'm Paying Off My Debts

Debt Snowball|Debt Avalanche|Payoff MethodsThe other day, a reader asked about my debt payoff method, interest rate and minimum payments. Today I'll be spilling all of that info for you. But first, I want to review two of the most popular debt payoff methods: debt snowball and debt avalanche.

Debt Snowball:
The debt snowball method is promoted by popular financial guru Dave Ramsey. It involves listing your debts by total amount owed, rather than interest rate. You then pay them off according to their size. After you pay off the first debt, the payment is rolled onto the next debt. Example: if I was paying $25 to credit card A and $25 to credit card B and A is now paid off, then my payments to credit card B will increase to $50.

The idea behind this method is that you will see successes sooner and more often that if you were paying debts off by their interest rate because smaller balances will be paid off more quickly. This will motivate you to continue paying off more and more debts because you like the results. The downside is that you will pay more interest using this method than the debt avalanche.

Debt Avalanche:
This method involves paying off debts based on their interest rate. You essentially ignore everything but the interest rate, focusing on the highest one first. This ensures you will pay the least amount of interest possible, but you will not see results (zero balances) as quickly or as often. You can still roll the payments onto the next card as shown in the example above.

I have been following the debt snowball method up to this point because I think I need to see some successes to keep me motivated, this just fits my personality.

Here is a list of my debts with their interest rates, minimum payments, and total debt amount:

Interest Rate
Minimum Payment
Total Debt
CC 9
0.00 till 9/22/14
CC 4
CC 6
CC 5
CC 7
CC 8
CC 11
CC 10
Student Loan

The debts are listed in the order I plan on paying them off (mostly). As you can see, I am deviating from the debt snowball method a bit. I am choosing to pay off CC 4 and 6 before CC 5 due to the difference in interest rates, their balances are very similar and paying them off by interest rate will save me a few dollars along the way.

The minimum payments listed above are all accurate except on CC 9. The minimum according to the statements they send is only about $66. The reason I list it higher is because $148.84 is the minimum I must pay each month to pay it off in time for the 0% interest promotion. I HAVE to pay it off before the end of September or I risk being charged interest in arrears from the time I purchased the furniture. I think the amount of interest would be somewhere around $2-3k if I don't pay it off in time.

I am also going to be paying on the debt to my parents even though they don't charge me interest or a minimum payment. The reason is because I hate owing them and I don't want to damage our relationship by putting them off to last. I am hoping to pay them $50-100 a month.

You'll also see that CC 1, 2, and 3 are not listed, that's because 1 & 2 were paid off prior to 12/31/12. CC 3 was paid off in March!

If you have any further questions, don't hesitate to ask. What method are you using to pay off your debts?

Note: To expand on some of my car woes, (here and here) I've now got a broken piece in my steering wheel for my turn signals. It's not too pressing, the signals still work they just don't shut off on their own anymore, but it will still need to be fixed at some point. Before I started my debt payoff journey, I almost NEVER had to fix/repair or even really maintain things on my car (except gas and oil changes of course). Ahh the irony!

Another note: If you are interested in guest-posting at Shoeaholicnomore, email me at shoeaholicnomore[at]gmail[dot]com!


At April 7, 2014 at 11:57 AM , Anonymous Catherine said...

It's nice that you're snowball method is almost avalanche method as well. In your method, you won't end up spending too much extra in interest.

At April 7, 2014 at 1:15 PM , Blogger shoeaholicnomore said...

Catherine, You are so right. My snowball and avalanche methods wouldn't make too much of a difference either way. I guess I'm lucky in that way? I'm excited to keep plugging away at these debts and get them gone!

At April 7, 2014 at 3:12 PM , Anonymous E.M. said...

I think everyone should use the method they feel is most effective for them. It's good that you know yourself well enough to go the snowball route in the beginning. Some people need quick wins to make the journey more exciting! My car was totally fine up until a few months ago, so I feel your pain. It's really annoying when you finally set out on getting rid of debt, and then all these things start piling up. You'll make it through!

At April 7, 2014 at 3:19 PM , Blogger shoeaholicnomore said...

Thanks! I know I'll get through it, it's just frustrating. I'm hoping that I can get everything fixed and be good for a while, but we'll see what happens. I sure hope my car doesn't continue heading down this path of destruction :)

At April 7, 2014 at 8:56 PM , Anonymous Girl Meets Debt said...

I consolidated my 2 credit cards into one personal loan and since my student loans were on the interest relief, the decision to choose snowball or avalanche was pretty obvious with me. You are doing awesome so far with your debt repayment, keep up the great work! :)

At April 7, 2014 at 9:05 PM , Blogger shoeaholicnomore said...

GMD, thanks for the encouragement! I considered trying to consolidate at least a portion of my credit card debt, but with credit score being somewhat low (I haven't had a lot of history yet) and a high debt:income ratio, the chance of approval was very low. I'm hoping that by paying down my debts, my score will be improved.

At April 7, 2014 at 9:15 PM , Anonymous KK@ Student Debt Survivor said...

I sort of did a hybrid approach when I was paying off my student loan debt. I paid the highest interest rate loan then the highest balance. Thankfully I didn't owe any family members (if I did, I'd want to pay them first).

At April 8, 2014 at 5:25 AM , Blogger Amanda S said...

You have a really good system set up there! A lot of people get so overzealous and just pay off random amounts, that they end up forgetting some of the stipulations (like your furniture). You can do it!

At April 8, 2014 at 6:42 AM , Anonymous Anonymous said...

This is probably the most reader-friendly explanation of the debt snowball vs. avalanche method that I have read. I plan on taking a look at my finances and deciding what will be best for me on a low income. Thanks!

At April 8, 2014 at 8:07 AM , Blogger shoeaholicnomore said...

KK - Mine is sorta a hybrid also. I don't think it's possible to pay my parents off first, as I have a LOT of minimum payments I MUST make each month, but I am going to pay them some each month. They are being very kind, not charging any interest and no minimum or deadline for payment.

At April 8, 2014 at 8:08 AM , Blogger shoeaholicnomore said...

Amanda - Thank you! The compliments mean a lot. I am trying to do it strategically to make sure I don't get caught and end up paying WAY more interest than necessary.

At April 8, 2014 at 8:09 AM , Blogger shoeaholicnomore said...

Downstairs - Yes looking at each method and comparing it to your situation is the best way to decide what will work best for you. Glad you enjoyed and, hopefully, understood the explanations of each method. :)


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