Another 2018 research paper published by james madison university
evaluated the math behind each strategy and concluded- overall this analysis provides
compelling evidence in favor of the debt snowball as a viable method for debt relief.
There's truly only one way to get out of debt and that is to pay it off until you have a zero
dollar balance left. The creditor that you have the loan or the debt through wants to keep you
in debt for as long as possible for as much as possible because the more debt you have and
the longer you have it the more money they're going to make off of you in interest. That's
the only way they make money off of the loan is through the interest. So you need to have
the opposite mindset of I need to have the least amount and get out of it the soonest
so that I'm penalized the least when it comes to interest. There's no secret
tricks to getting out of debt but this video I'll give you two strategies that
you can use to get out of debt and at the end 5 quick tips on how to get out of debt.
The first strategy is going to be the debt avalanche. The debt avalanche says line up
all your debts from highest interest rate to the lowest interest rate and start by paying
off the highest interest rate debt first. So while we're making minimum payments on all our debts,
we put any extra money towards the higher interest rate debt until that's paid off.
Then we continue making minimum payments and we move the extra money to the next highest
interest rate payment until that debt is paid off. So for example, if you have a five thousand dollar
credit card debt at seventeen percent... this is your highest interest rate. This
is what you're going to start paying on first. Then for example, you have a thirty thousand
dollar student loan at a four percent interest rate... this is your second highest. Tou list
that afterwards and then your last debt you have a ten thousand dollar car loan at one percent,
that would be the last debt that you would cover. The reason and the goal behind the debt avalanche
is to start tackling the highest interest rate first because
that is the loan the bank is making the most amount of money off of you.
Mathematically out of the two strategies we cover in this video this strategy makes the most sense.
It's a numbers game and we're trying to bend the numbers to work in our favor as much as possible
The second strategy is going to be the debt snowball. The debt snowball says list all your
debts from smallest to largest and then start making minimum payments on every single debt.
All extra money goes to the smallest debt first until that's completely wiped out. Then we go to
the second smallest debt until that's completely wiped out and it keeps snowballing. Keep in mind
these two strategies don't include your mortgage. It's only consumer debt, so when we're using the
debt snowball, if you had the five thousand dollar credit card debt we're going to list
that first because that's your smallest loan. Then we're gonna list the ten thousand dollar
car payment next at one percent because that's your second largest. The last debt we're going
to tackle is going to be the $30,000 student loan. So we're not focused on the interest rates at all
we're just focused on the actual amount that you owe. The goal of the debt snowball,
which has been championed by dave ramsey over the years, is to build momentum. It says unlike
the debt avalanche it's less about the numbers and the mathematics and it's more about your behavior.
Debt can be extremely overwhelming especially when you owe thirty thousand dollars in student loans,
you're paying a hundred and fifty dollars a month and you're barely seeing the needle move just
because the interest continues to stack up and you're looking at the next 30 years of paying this
and wondering how are you ever going to get out of debt to the point where you just accept that debt
is normal and I'm going to be in this probably forever. The debt snowball gives you the small
wins you pay off the quick five thousand dollars with a lot of momentum you roll that momentum
into the ten thousand dollars and those small wins give you boost of confidence. So which strategy
are you going to choose the avalanche or the debt snowball? A 2012 study by two associate marketing
professors in northwestern university kellogg school of management; they studied the records
of thousands of people who participated in credit card debt settlement programs.
The study compared people who used the debt snowball approach recommended by Ramsey and others
as those who took the rational approach of first paying off the cards with the highest
interest rates (that'd be the avalanche). Their results were consumers who utilized
the less rational snowball method were more likely to actually eliminate credit card debt.
Another 2018 research paper published by james madison university evaluated the math behind
each strategy and concluded overall this analysis provides compelling evidence in favor of the debt
snowball as a viable method for debt relief when applied to a very large very meticulous
sample of real-world data the snowball's empirical performance was equal or very close to the debt
avalanche. In a large majority of cases further the psychological benefits of the debt snowball
recommend it strongly to debt-ridden consumers as the avalanche method can be daunting to households
facing a very large debt to pay up front before moving on to the next source. So that 2018 study
is basically saying the amount of interest you're going to save by doing the debt avalanche was so
miniscule or almost equal to the snowball and then with the snowball you also get the psychological
benefits therefore making the snowball method better. In my personal experience... my
opinion on this is when I see people struggling financially it is almost always if not always
behavioral or discipline issues within their finances and has very little to nothing to do with
how much they actually make. So I have to suggest the debt snowball because I do agree that it is
less about the numbers and more about building momentum and changing your behavior and I do see
people when they get on the debt snowball and they get those small wins they start paying off
that debt so fast that the interest rates between seven percent five percent or your
three percent loans don't even matter because of how quickly they're getting out of debt.
Last part of this video is 5 quick tips for helping you get out of debt! Number one is
you need a budget. You need a budget when you're getting out of debt because I guarantee you there
are hundreds of dollars every single month that are slipping through the cracks that you don't
realize you're spending on things. Where we could better use those hundreds of dollars and
apply that towards your debt to help you get out number two is any bonuses raises tax returns extra
money throw that on to the debt I encourage this strategy too when it comes to investing to avoid
lifestyle creep. If you're only contributing 5% to your 401k or 10% to your 401k, as you get raises
and bonuses pulling that money in and taking it home with you and creeping up your lifestyle or
inflating your lifestyle take the extra money and bump up your investing to 15% and you won't notice
a difference because you're still taking home the same amount of money. All extra money is bringing
you up to speed of where you should be investing you can do the same thing when it comes to debt.
Number three is you can actually make settlements with creditor. So if you owe ten thousand dollars
in credit card debt if you call them up and make a three thousand dollar all-cash offer they may
take that just make sure you get it in writing before you pay them the three thousand dollars
saying that that will settle the loan completely. The only caveat to this is you need to have that
actual liquidity the three thousand dollars in your bank account to pay them. Number four is you
really need to get inspired when you're getting out of debt. There's plenty of books that you
can read I'll link some in the description down below, there's podcasts that you can listen to
stay motivated, have an accountability partner, talk about it with people, talk about your journey
with people etc... So that they will encourage you to keep going because you will burn out.
And lastly stay focused when you're getting out of debt and remember why you want to be financially
free. Whether it's to pay for your kids college to retire early to go on more vacations to buy a new
house whatever the case may be continually remind yourself that this step of getting out of debt
is launching you towards those goals. Thanks for watching guys! If you got any value out
of this video please hit the LIKE button and if you want to see more videos like this go ahead
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