Learning about and following these methods helped my net worth hit new highs.
When I was still living in Fresno and attending Fresno City College, I was pretty consistent with credit card payments and rarely spent money. I didn’t check my credit or even fully understand what credit meant at the time, yet I guess I had really good credit. I continually received credit limit increases and never had an overdraft despite rarely having more than a few hundred dollars at any given time, most of which came from my job where I fixed ATMs.
When I finally moved to San Francisco to attend the Art Institute of California, all the freedom I now had while living in a big city on my own didn’t help. I opted to not work and instead would take a portion of my student loans to survive each semester. This was a terrible thing for me. I had a giant check and felt I could spend it on anything I wanted. Not to mention my Wells Fargo credit card, with a limit of $8,000, which I used willy nilly on random expenses when my checking account was too low.
After a while, I started missing payments, overdrafting my checking account more often, etc. Everything that could go wrong did. In 2008, I graduated college with over $100,000 of student loan debt, an $8,000 credit card that had gone to collection, and a demolished credit score. I don’t even remember what my score was, but I remember it raised a red flag any time I tried to apply for assistance in paying down debt.
Some time in 2015, I realized I needed to know where the heck my money was going. I had finally gotten some sense knocked into me and started tracking my spending. Fast forward to 2018, two years before the COVID-19 pandemic. By this time, I had collected three years worth of spending habits, trends, etc through my own spreadsheets. Still, I had no plan regarding my debt other than “don’t miss a payment”. I was barely making the minimum payments with the occasional extra payment when I felt like it. This was a terrible way to manage debt.
Finally, in 2019, I decided that I needed to get my sh*t together. I started really digging into different ways to pay down debt. Two methods popped out at me: the Snowball method and the Avalanche method.
The Avalanche method is exactly how it sounds. Pay off enough debt until it all comes tumbling down. This method focuses on paying down the debt with the highest interest rate by putting a little more money into that monthly payment than the minimum. After you pay off a debt, you take the payment you were making on that debt and put it towards the next highest interest rate. Then, you would continue this to the third highest debt and so on and so on until you’re debt free.
With this method, you prevent yourself from losing too much money to your high interest rate debt and save more money in the long run. However, critics of this method argue that it's slow going and can be hard to see initial progress, which can deter people before they really begin.
For those that have read my other articles, you know I am a big fan of spreadsheets. So, of course I’ve built crazy projection models to see which method would work best. When I learned about this method, I was roughly earning $90,000 a year. For most people, this was a great salary. However, for me this was barely enough due to my high level of debt and definitely not enough to follow the Avalanche method. Instead, I opted to follow the Snowball method.
With the Snowball method, you pay down your debt with the smallest balance by also putting in more than the minimum payment each month. As you pay off that debt, you would take the monthly payment and apply it to the next smallest balance. Then the third smallest, fourth smallest, and so on until you were debt free.
With this method, it is a lot easier to see progress. My smallest debt at the time was a $500 Federal student loan. While the required minimum payment was roughly $23, I had an extra $50 that I could put towards this debt. Doing so helped me do something that I never thought I could do for another 20 years. I paid off that debt in a few months. Then, I shifted my focus to the next debt.
After paying off two Federal student loans, I decided to shift my focus to my credit cards and pay those down since they had an average interest rate of 23% while my student loans were floating around 6-8%, and that was only because I took out some private student loans. Doing this has greatly helped my credit score. Since then, I’ve been able to pay off four credit cards, including one of my wife’s, and brought my credit score up from the low 500s to the mid 700s!
Critics of this method argue that your smallest balance isn’t necessarily your highest interest rate, which means as you’re paying down the smallest balances, you could be accruing a lot more interest on your high interest rate debt. However, I’m totally into instant gratification and seeing my debt drop by the thousands every month has been really inspiring. I’ve already paid down two student loans, four credit cards, and am on track to pay off another credit card next month. By my calculations, using the Snowball method would have both myself and my wife debt free by February 2023. That’s a mere 18 months from now and only if we don’t put more towards our debt.
Starve and Save
Another method that I started looking into but have not been able to fully apply yet is the Starve and Save method. This method is best utilized by a two income household. Since my wife and I both work, in order to apply this method we would live off one income while investing and/or saving the other. By my calculations, we would be able to live off my wife’s income while investing my income. In doing so and with an average market return of 8%, we would meet our retirement goal in roughly 8 years. However, with our current level of debt, we have to extend that a little bit. But, that’s a sacrifice we’re willing to take as we move towards finally being debt free!
I don’t know what level of debt you have and what income you’re earning, but if you take a moment to think about these three methods, you may find one that can be integrated into your current spending habits in order to pull yourself out of debt. I’m super glad that my wife and I have been lucky enough to be able to put more money towards our debt while still being able to take trips, enjoy fancy dinners, save for a rainy day, and invest a portion of our income.