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Debt Snowball Can Become an Avalanche – Beware Dummy!!

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Credit cards are like a chainsaw, they can be a truly helpful tool, but can also be enablers of bad, destructive habits, like cutting-off your financial legs.

Using credit cards to spend outside of your means on consumer goods, nice dinners other luxuries that are nice to have but not feasible with your current income level. 

No matter why you’re using your credit cards, though, it can be very easy (too easy, some might say) to get way in over your head with debt. Most creditors don’t care to differentiate between debt that you are forced to take on and debt that you irresponsibly choose to take on – it’s all the same to them.

If and when you get in over your head with your finances, though, it’s important that you figure out exactly how you’re going to manage your credit card debt. Without a plan, debt can feel almost impossible to pay off. With a plan to manage your debt, though, you’ll be on the right track to regaining control of your finances – and your life.

How to Fix This? Let’s turn to our friends at National Debt Relief for some pointers:

1. How do you figure out how much you owe in debt?

When you’re up to your neck in debt, your first instinct is going to be to avoid thinking about your debt as much as you can. You’re likely to throw out all of your credit card statements without reading them, delete emails from your creditors without reading them and, if things are really bad, screen calls from unknown numbers for fear of getting harassed by collections agent.

In other words, you’re approaching your debt with the same kind of toxic attitude that got you so far into credit card debt in the first place. For short-term comfort, you’re purposefully ignoring the long-term picture, hoping that it will work itself out.

Here’s the bad news: it’s not likely to happen. Individuals in a lot of debt don’t suddenly get out of debt without facing down their problems. That’s the truth, whether you like it or not.
If you’re going to get out of debt, you need to face facts. And that starts with figuring out how much you owe.

First, stop throwing out and deleting those statements. You’re getting them for a reason: so you can figure out how much you owe. Your creditors might not seem like your friends, exactly, but it’s in their best interests to make sure that you stay informed.

Tuck those statements in a folder somewhere you won’t forget them. Once you build up a whole month’s worth of statements, pull them back out and get to work.

If you’re computer savvy, open up a new spreadsheet and start inputting the information from the spreadsheets. Put down who your creditor is, how much the minimum monthly payment is, the total amount of your debt, your interest rate and the date that your payment is due.

If you’re not fluent in spreadsheets, you can do the same with a pen and paper, but it’s a bit harder to keep track of or do calculations with.
Add up your minimum monthly payments. You might be surprised how much of your income goes towards paying off debt every single month and it can be a real eye opener to see it calculated.

Then, add up your total debt. If the minimum monthly payment didn’t boggle your mind a little bit, your total amount of debt probably will.
If you’re feeling especially adventurous, divide your total amount of debt by 36. That number is what you’d need to pay each month to get out of debt in three years.
Now you know exactly how much you owe. It’s not fun to face facts, but it does give you a basis of knowledge from which you can make intelligent decisions about your future.

2. How do you figure out your personal finances?

You know how much you make each month, even if it’s just a rough estimate based on how many hours you get scheduled for. But figuring out your personal finances has a lot more to it than just knowing your rough monthly income.
First, take stock of how much money that you have. That’s not just how much money you have sitting in your bank account. That includes money in your savings accounts and anything wrapped up in investments, 401ks and any other financial instruments. If any of that money is in accounts that compound interest, take note of the interest rates too.

Then, take stock of how much money that you make, roughly, in a month. If you’re on a salary, then this will be an easy-to-figure-out, stable number. Hourly employees might have a more difficult time nailing down a number, but you can definitely hazard an informed estimate based on the last few months.

Finally (and this is the hardest part), make a budget of your average monthly expenses. Start with fixed, essential expenses like your rent, your car payment, insurance and that monthly minimum debt payment that you calculated already. Then, try to arrive at a number that you can afford to spend on variable but essential payments, like groceries, gas and more. Give yourself a small cushion to allow for emergencies and unexpected-but-necessary expenses.

Compare that number to your monthly income. The difference is the wiggle room that you have to pay down your debt and make an investment in your future.

It might not be much, but it’s your money that you have to work with. It’s much better than using credit to continue to stretch your financial limits.

3. Where do you start with paying off your credit card debt?

The first thing we’ll say here is that, unless you know exactly what you’re doing, you shouldn’t stop paying any of your monthly minimum payments.

That said, if you’re serious about paying off your debt, you’re going to have to prioritize some debts over others. These are the debts that you’ll direct your extra income to in order to pay them down first.

4. But how do you decide where to start?

If we limit the conversation to credit card debts, it gets easier to figure out. There are a few considerations to take into account here.
First: which debt, when eliminated, is going to help you and your financial future the most?
There are calculators online to help you figure out exactly how much eliminating each debt will save you, but in general, it’s a function of your interest rate and how much you owe on the debt. Eliminating a high-interest payment may save you more money each month than eliminating a lower-interest payment, especially if the amount you owe is greater, too. However, it may be more feasible to target a smaller amount first so that you can knock that debt out quicker.

It also feels pretty good to eliminate a debt, no matter what size it might be.

If you plan to use credit anytime soon to make a large, essential purpose (like if you need to purchase a new car to keep your job), then you should take your credit score into consideration as well.

Credit scores take a lot of factors into account, including something called a “utilization ratio.” A utilization ratio is, simply put, how much of your available credit that you’re actually using. The rule of thumb is that 30 percent is a pretty good ratio, though the less of your available credit you’re using, the better. If you’re reading this article, chances are that your utilization ratio is much higher. If you absolutely need to use credit in the near future, then it may be in your best interest to focus primarily on bringing down your utilization ratio.

5. What is the “debt snowball” vs. the “debt avalanche?”

If you’ve been researching debt repayment and debt management strategies on the internet, then you’ve probably encountered the terms “debt snowball” and “debt avalanche.”
These are cutesy terms for very real strategies for paying down your debt. One is not better than the other; rather, they reflect different priorities and approaches towards paying down debt.

5a. The Debt Snowball?

The big idea behind the debt snowball is momentum. Like a snowball rolling down a hill, people who take on the debt snowball technique gain a little more momentum with every payment so that the debt management and repayment process only gets easier over time.

With the debt snowball, you focus on your smallest total balances first. You don’t concern yourself so much with things like interest rates, or even how much eliminating a debt is going to save you each month. You just focus on eliminating your smaller debts as quickly as possible in order to give yourself a financial and emotional boost. Paying off your smaller debts helps you to feel empowered and keeps the momentum up for you to pay off all of your debt eventually.

The goal here is to build up good financial and repayment habits and stay on track. If you’re struggling to keep up with a self-imposed repayment plan, then the debt snowball can be a really great strategy to keep you motivated.

5b. The Debt Avalanche?

The debt avalanche is closer to the repayment strategy that we alluded to when we were talking about making a personal budget. With the debt avalanche, you focus on paying off your higher interest rate debts first, regardless of the size of the balance.

The benefits to the debt avalanche are twofold. First, the avalanche may be more likely to save you money than the snowball in the long run. Paying off high interest debt means less debt compounds over time.

The avalanche is also more likely to save you time. High interest debt creates more debt more quickly, so if you let it compound without facing it directly, you’ll have more overall debt to pay off. That means it will take you more time to pay it off.

That all said, the debt avalanche isn’t always the best option. Unlike the debt snowball, the gratification of paying off a debt is full is delayed for a much longer time, making it much easier to lose your momentum and fall off track.

6. What if you can’t pay off your debt on your own?

More bad news: the universe isn’t always fair and your financial problems aren’t always things that you can deal with on your own. Even with the most disciplined spending and budgeting, you might not be able to devote enough money to repayment to make much progress on your debt, at least anytime soon.

Fortunately, options exist for individuals and families in Las Vegas to get help dealing with their debts in an efficient manner.

There are a lot of options out there, but one of the best for many people is debt consolidation.
Debt consolidation entails taking all of your various debt payments and finding a way to consolidate them into a single, easier-to-handle payment that’s hopefully less than what you’d pay in separate payments throughout the month.

There are two major ways that people undergo debt consolidation.

***Some debt consolidation companies offer loans that allow individuals and families to pay off all of their credit card debt at once. Instead of having to manage multiple high-interest credit card accounts, they are able to pay off a single, lower-interest loan and get their finances in order in a much easier way.

***Other debt consolidation companies offer savings accounts that allow you to bank up a sizeable amount of money over a predetermined period of time. In that period of time, you stop making payments to your creditors and pay into the savings account instead. You also close your credit accounts, forcing you to develop more responsible spending habits and spend within your means.

At the end of the predetermined period of time, the debt consolidation company uses the money that you’ve banked in your savings account to negotiate with your creditors on your behalf. Ideally, your creditor will accept the lump sum you’ve put into the savings account now instead of the promise of your spaced-out debt payments over time and you’re able to get out of debt much more quickly.

Each debt consolidation strategy has its merits and it’s up to you to figure out which is best for you.

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