I will admit that I have never picked a side on the avalanche or snowball methods of getting out of debt. Mainly because I’ve always had an emotional attachment to paying for things and my credit card has always been about getting money back for things I have to spend on (also in case anyone steals it, it’s easier to deal with the fallout).
But today I will point out why people like the avalanche method.
- the bigger interest grows less when you hit the principal
- your net worth looks less scary each month
- you see progress more visibly than with throwing money at all of them
There are downsides.
- the first debt paid off usually takes longer
- it doesn’t always make your payout time as short as other methods
The avalanche method is taking the highest interest of your loans and paying that one in full. But that doesn’t always work out the best. My highest interest loan is on my car, and I have GAP insurance. It doesn’t make sense to pay this off early unless I’m sitting on cash. And my current financial situation is that I’m not sitting on cash.
The next highest loans are merged into the smallest because my student loans have 6 different interest amounts depending on when they originated. They also still have the longest term length. Oh, and I was a simpleton and did graduated income repayment when I started paying them so my amount due changes every two years…
So which one should I do?
It’s complicated. I thankfully have a nice loan originator and they tell me which loan is getting the most interest every month. Which one is taking the most of my money per the dollars that I owe on it. They also happen to be the smallest amounts of loan ish ness on my account. YAY, unsubsidized loans, little buggers.
This looks a little lopsided because I paid 5 times in May, and it dropped all of that payment into the little one. Which is fine because I’m taking a snowball method with this particular loan. Also, I should mention that I round up on all of my loans because it lets me know a charge is actually mine on my bank account. But think about the money I’m not going to be paying into that one weekly and then it’ll go to the next biggest one.
My biggest problem is that paying off any of my loans early only gives me one thing. No debt, but with my job that’s not really a good thing if I have nothing to fall back on. So, while I swear on Baby Steps from Dave Ramsey, I’m doing them in the order that makes sense to me. I’ve always felt that the first step is the first step but the other six are things that you have to do in the order that makes sense to you. 2 & 3 can be switched around (pay off debt and save 3-6 months) depending on what is going on in your life. 4-6 have always felt like simultaneous things (a little bit here, a little bit there) and 7 is obviously the last step because you can’t help anyone if you can’t help yourself.
Which begs the question, why should I have anything to say?
Because I’m on the path to fixing my situation and I’m not so far removed that I don’t know what the price of milk really is (currently $3.23 in CHS).