Debt Repayment

Let’s say you have extra money that you want to put toward debt repayment. What’s the best option?

There are 2 prominent debt repayment strategies: the avalanche method and the snowball method.

Both methods involve you continuing to pay your minimum payment. The avalanche method then has any extra money go toward the debt with the higher interest rate whereas the snowball method would have the money go to the lowest principal.

As an example, let’s say you have 3 sources of debt:

-        Mastercard with a balance of $8,000 and an interest rate of 20.99%

-        Student Line of Credit with a balance of $55,000 and an interest rate of 3%

-        Auto Loan with a balance of $5,000 and an interest rate of 6%

Using the avalanche method, additional money would be applied to the Mastercard first, then the auto loan and finally, the student line of credit.

With the snowball method, it would start with the auto loan, followed by the Mastercard then end with the student line of credit.

So what’s the philosophy behind each?

The idea behind the avalanche method is that the interest paid would be lower whereas the snowball method gets you quick wins by closing out lower value debts quicker.

At the end of the day, everyone needs to choose the debt repayment plan that works best for them.

Personally, with my current debts, I’ve decided to use the avalanche method however after finishing my first stint of university, I was using the snowball method to get out of debt.

What’s also really important is addressing some of the emotion around debt.

There are some people who are perfectly at ease with carrying debt and making their minimum payments every month.

There are some who want their debt gone ASAP and live a frugal life to achieve this.

There are some who feel a sort of shame with having debt which often can be brought on by external forces.

Wherever you fit on this scale, I think it’s important to investigate why. Get in touch with yourself and how you look at your financial situation.

Some questions you could ask yourself while reflecting on this part of your financial relationship:

Where does your relationship with debt originate from?

If you’re comfortable with debt, why?

If you want to live the frugal life, why? What will you be missing out on?

If you’re feeling shame, why? What does debt mean to you that leaves you feeling this way?