The other day I wrote that we were finally getting naked with our finances. We plan to be transparent with what we owe, our debt repayment plan, and our progress at least monthly.
Debt Avalanche: Our Current Debt Repayment Plan
What Is The Debt Avalanche?
The debt avalanche is where you list all of your debt in order by interest rate from highest to lowest. Then you proceed to pay off your debt in that order. By doing this, you ensure that you will pay the lowest amount of interest possible during your debt repayment period.
For this to be most effective, you will pay nothing more than the minimum payment on all debt accounts, with the exception of the highest. For this account, you will pay the minimum plus any additional amount that you are able to pay against your debt.
Once you pay off this account, you repeat the process with the remaining accounts. Your payment to the new highest interest account should include, the minimum payment that you were making to this account, all of the extra cash that you were able to throw against your debt, and the old minimum payment from the previous account that was paid off.
For example, if the minimum payment to your highest interest account is $50/month and you can afford to pay $100/month extra toward your bills, you will pay $150/month to that account until it is paid off. Once it’s paid off, then you take that $150 and add it to whatever you were paying toward the debt with the 2nd highest interest. If it was $40/month, now you are paying $190 each month toward that account until it is paid off!
You continue this cycle, continually adding more money to the subsequent payments as the first accounts on your list get paid off!
Debt Avalanche vs. Debt Snowball
Everything that I stated above about the debt avalanche is the same for the snowball, except the initial step. Instead of listing your debt accounts from highest to lowest by interest rate percentage, you list your debt from lowest to highest by amount owed.
So you end up paying the accounts with the smallest balances first. The benefit of this method is that you will reduce the amount of accounts that you have to pay off faster than you would by using the debt avalanche. Some people gain a psychological boost from seeing the number of creditors go down. With us having 18 creditors, I can definitely see the benefit in seeing that number drop rapidly.
However, if you choose to employ the debt snowball method rather than the debt avalanche, you will end up taking longer to pay off your debt. Also, you will pay more in interest, since you are not focusing on getting rid of the higher interest rate cards first!
So even though we would love to see the number of our accounts go down, we are more interested in paying less interest overall.
I am not completely ruling out the chance that we may switch over to the debt snowball method if we are close to paying off one or two accounts, but it would only be if we can pay off the small balance within a month or two. Other than that, we are sticking it out with the debt avalanche!
Our Debt Repayment Plan:
Here is the order in which we plan to pay off our debt from least to most important.
3) Personal Loans – There were the loans that we had to take from 2 separate family members. As it stands now, these will be at the bottom of the list until we are at a place where we can afford to use more each month to pay off our overall debt.
2) Student Loans – These all have extremely low interest rates (compared to our credit cards), so we will continue to pay the minimum monthly amounts due, until our credit cards are all paid off.
1) Credit Cards – Since these accounts have the highest interest rates, these are our top priorities. Outside of a couple of small adjustments (mentioned below), we plan to follow the debt avalanche method until we are debt free!
A Couple Of Adjustments To Our Debt Avalanche
We have 2 credit cards (#s 9 and 12 on the list of our debt) that currently have a balance at 0%. We have about 4 months left to pay off the balance on card #4 before interest accrues on the remaining balance (it was originally for 6 months). Also, we have a year to pay off card #12 before the same thing happens.
We’re scheduled to pay off card #4 in June and #12 in September or October, and once we do, we will go back to our normal debt avalanche plan (pay off the highest interest account first).
A Few Notes About Our Debt Repayment Plan
I haven’t shared the timetable with you because I know it is going to change. First, it will change because I’m sure things will come up that we are not expecting. Part of our budget includes building back up our emergency savings account, but even with that in place, we know that things can and oftentimes will come up to change the best of plans.
The second reason why we know the details will change is because our current plan is unsustainable at our current income level. We are being very aggressive with our budget over the next few months in order to pay off those 0% interest accounts within the respective promotional periods. Once they are paid off, we will add a few things (like saving for car maintenance) back into our budget.
I plan to update the site regularly to show you how we are doing with our plan. You’ll get to see the numbers slowly go down right with us!
Please let us know if you have any specific questions about our debt or our repayment plan.
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