- [Jarrad] In today's video you'll learn
about the two options you have
when it comes to paying off your debts
so that you know which method will work best for you,
and then towards the end of the video
I'll give you my thoughts on both methods
and then I'll also introduce you to a tool
that might help you make a better decision.
The dogs down there and he's breathing really hard
so I'm sorry if it's kind of loud.
You really truly want to pay off your debts,
but you are scared to start.
You're scared to start because
which debts do you start to pay off first?
Not because you don't want to pay them off,
but because you have different debts
with different creditors.
If you're got a Target credit card over here,
five student loans over there,
another Amazon credit card over there,
and a car loan as well.
oO top of that they all have different current balances,
different minimum payments,
and different interest rates.
That's a lot to juggle.
Oh yeah, and on top of that
you want to make sure that you're going to pay them off
in the most efficient way possible
or you want to make sure that you're going to have
the motivation to pay them off
throughout the whole process.
Are you overwhelmed yet?
If you are, then I don't blame you,
because that's a lot of decisions to make,
a lot of important decisions to make
to the point where you might even get decision fatigue
and not even choose at all.
So where do you start?
(deep breathing)
Take a deep breath,
because it's not as difficult as you may think.
The two most popular strategies to paying off your debt are
The Debt Snowball Method
and the Debt Avalanche Method.
Which is sometimes referred to as
the Debt Stacking Method.
Both are great methods,
but deciding which one to choose is all going to depend
on your particular situation.
So let's get into them both right.
The first option we are going to talk about today is
the Debt Snowball Method,
and I've created a scenario for you to help you follow along
Visually, it should be a lot easier.
So what we need to do first,
what the Debt Snowball Method directs you to do
is to first list all of your debts
from smallest current balance to largest.
So we've got the $5000 up at the top
and we've got the largest which is $12,500 at the bottom.
And what the Debt Snowball Method wants, or tells you to do,
it doesn't ask you, is it wants you to pay
minimum payments on all of your debts.
Cool, the $1,260.
And any extra money that you have
to put towards your debts every month,
you're going to put it towards the first student loan
up here, with the smallest current balance.
So this method doesn't want you to pay attention
to the minimum payment,
it doesn't want you to pay attention to the interest rate
when it comes to paying the extra money.
And what this results in is,
you get your first debt, up here, paid off a lot quicker
because you're focusing all of your extra money
towards that $5000 debt.
You're going to get it paid off really quick
as opposed to focusing on maybe the $12500.
And what this results in is
a psychological win for yourself
to kind of give you that kickstart
to help keep you motivated throughout the process.
Now a couple things to note is that
if you do choose the Debt Snowball Method
it will take you a little bit longer to finish.
Not that much longer, depending on your current situation,
but it could take you a little bit longer.
And then also keep in mind that you will be paying
a little bit more in interest depending on how much you have
and your interest rates and balances and things like that,
but in general you will be paying more interest,
but the point of this method is that psychological boost.
And some people need that and they would prefer that
over saving certain amounts of money.
And that's perfectly okay.
Now let's say that you have an extra $200 a month
to put towards your debts.
You'd of course cover your minimum payments
on everything else, got it,
but then where are you going to put that $200?
Well based on the Debt Snowball Method,
you would actually put that $200 towards the first debt
that we have listed up here.
The one with the smallest current balance.
So instead of $75 you would actually be paying $275
until that current balance was gone.
So let's fast-forward a little bit
and say that $5000 debt is gone.
What are you going to do with that $275?
We're going to start pretending like it's a snowball,
so you're going to snowball that $275 payment
into the next debt
with the smallest, lowest, current balance.
In this case,
I know this current balance would be a little bit lower
by that point in time
But that's okay.
Not a big deal.
For simplicity purposes we're going to keep it at the $6000.
So that payment wouldn't just be the $225 minimum,
it would actually be $500.
Because you're rolling that $275 into the $225.
And then you're just going to continue
with that whole process.
The second option that you have
is the Avalanche Method
or the Stacking Method.
What this method tells you to do
is to take all of your loans, like this,
and they want you to rank your loans starting out
with the debt that has the highest interest rate.
And unlike the Debt Snowball Method
what they want you to do is put all the extra money
that you have to put towards your debts
put it towards the debt that has the highest interest rate.
(Thump) That's the goal here.
Sorry if I hit that microphone, my bad.
So they don't want you to pay attention
to the total balance.
They don't want you to pat attention to the minimum payment.
They want you to focus on the interest rate.
And in this case, it sometimes,
it just depends on your certain situation,
sometimes it will take you a little bit longer
to get that first debt paid off.
Another thing to keep in mind is that
with the Avalanche and Stacking Method
you actually save more money in interest
in the long run
compared to the Snowball Method.
And then also you will become debt free sooner
is how it usually plays out
compared to the Debt Snowball Method.
Just like the Snowball Method,
you would want to take any extra money you have
going towards your debts,
so we'll just save $200,
and you'd want to pay that extra money
towards that first debt that we have listed up here.
Of course all the minimum payments on everything else,
but in this case you want to focus on that one debt
with the highest interest rate.
So in this case instead of $225 you'd be putting $425
towards this debt until it was paid off
and then you'd take that $425 payment
and you would stack it, or avalanche it,
down to the next debt that has the highest interest rate.
The tool that I mentioned at the very beginning of the video
is on a website called unbury.us.
And I'll put the link in the description
or somewhere on the screen here
so that you can navigate to it.
What's cool about it is you can put in your details,
of all of your loans,
so you add your loans,
loan name, current balance,
minimum payment, and interest rate
and then you can calculate the whole thing
and it spits out this data.
So I used this example from the Stacking or Avalanche
and the Snowball Method that we talked about earlier
in this video.
And what it does is it spits out all of this data for you
based on if you want to use the Avalanche or the Snowball
and you can toggle back and forth
and it'll show you on a graph how quickly you'll get
your debts paid off, particular debts,
and it'll tell you how soon you can get your debts paid off
and the interest rate.
And then you can also put some extra
into your monthly payment
and then it'll calculate that as well
so you can see how soon you can become debt free.
So it's pretty cool.
I enjoyed it.
Go ahead to that website and mess around with it.
I'm not affiliated with them at all.
I just think they created a very cool and fun tool
for you to help figure out when you're going
to become debt free.
And I say going because you will, if you really work at it.
You might be saying
"Okay Jarrad, thanks for all the info,
but which one should I choose?"
There's really no wrong answer here,
because I've seen both methods work for both people.
For me personally,
I'm a numbers guys and I want to save some money
and I want to get done as soon as possible
so I would recommend using the Stacking Method.
But if you need those small wins,
then definitely going with the Debt Snowball Method.
There's nothing wrong with that.
Don't underestimate the power of those psychological wins
that you might feel.
It doesn't always matter which method you choose,
because the outcome might be the exact same.
It all depends on the specifics of your particular debts
and how much you want to pay towards those debts
every single month.
Either way, don't let this decision hold you up.
Pick a method and move on,
because the main point of this whole thing
is to get out of debt.
And if you don't make a decision,
you'll never get out of debt.
I'm curious what your thoughts on these methods are.
Leave a comment down below
and let me know which one you like better.
Or if you'd tried one or the other
let me know which one worked best for you,
or which one didn't work very good for you.
Thank you so much for taking some time out of your busy day
to check out this video.
I hope you found some value in it.
I would greatly appreciate a like, comment, or subscribe,
because I love you more than,
I'll just show you, spreadsheets.
And I love spreadsheets, cuz I'm a nerd.
Alright, I'll talk to you next time.
Adios.