“There are decades where nothing happens; and there are weeks where decades happen.”
- Vladimir Ilyich Lenin
Life is constantly changing, and sometimes those changes come very quickly. Often, the times we are least likely to think about stopping to catch our breath and be present in the moment are the times in which it is most important that we do so. Many of us find ourselves in a vastly different position now than we were just two months ago. For some of us that might mean we have taken on more debt, while others have more free cash flow than they previously realized.
In our continuing commitment to bring you information that will allow you to do something proactive right now, we wanted to share a couple of the most popular methods for paying down debt. These may or may not be terms that you have heard used in this way before, but for our purposes, we’ll outline them this way: the Avalanche method of paying down debt is a strategy based on attacking outstanding debts in order from highest interest rate to lowest interest rate with free cash flow. This results in bringing the average interest rate crashing down. Alternatively, the Snowball method of paying down debt involves applying extra payments to whichever debt balance is the smallest in order to continuously free up additional cash flow to create a growing snowball cycle. In this scenario, the minimum payments of paid off debts starts to accumulate quickly, resulting in increasingly larger resources available to retire remaining debt. Both methods can be accomplished by making a list of your debts with their associated interest rates and balances and then sorting those lists in order of decreasing interest rates or increasing outstanding balances.
Mathematically, the Avalanche method of debt payoff should always result in less interest being paid and the final debt payoff being completed first. By systematically making extra payments to the debts with the highest interest rate first, the accumulation on those debts is decreased the fastest. Please note that this doesn’t mean the Snowball method may not be the more appropriate method to employ for your personal situation. Tackling the smallest balances first and watching the number of debts in your name quickly melt away can very quickly reinforce the habit of paying down debt and result in a higher likelihood of staying the course in your debt payoff journey.
If you have been adding to your debt balances, find yourself with additional free cash flow, or you have any other questions please feel free to reach out to your service team. We are here for you!