Author Topic: Debt Snowball or Avalanche??  (Read 3893 times)

halseyskates33

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Debt Snowball or Avalanche??
« on: August 22, 2016, 05:53:17 AM »

So I have $1,000.00 saved up to pay down debt. As it stands right now I owe $2518 on my car (no interest) and $3339.64 on a CC with 20% interest.

I am actually thinking of paying the money towards the car bc it is my second biggest bill every month and getting rid of it would lower my monthly expenses to around $1300. Psychologically I just want to never have to deal with a car payment again (this was my first)

However, I could do a balance transfer to my zero interest credit card (no balance) and knock down the credit card. Thoughts??

sis

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Re: Debt Snowball or Avalanche??
« Reply #1 on: August 22, 2016, 06:42:11 AM »
I mean I think the financially smart move is to pay off the bill with the 20% interest, obviously.  If you can transfer it to a zero percent card, then just pay off whichever you want.

2Birds1Stone

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Re: Debt Snowball or Avalanche??
« Reply #2 on: August 22, 2016, 07:27:21 AM »
20% interest is absurd, you may as well light money on fire every month while paying down your car.

EnjoyIt

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Re: Debt Snowball or Avalanche??
« Reply #3 on: August 22, 2016, 08:08:35 AM »
Currently you are paying $55/month to service the debt on the credit card.  I think it is way too much money to waste just to increase cashflow by paying
down the car.  Either way you need to refinance that card if possible.  A lower rate will save you money no matter what you decide to do.
Next lay out a spreadsheet showing how much extra you have every month and how quickly you can pay down that debt.  Try it by paying off the car first,
then try it paying off the CC card.  Look at the time frames for each and see what feels better for you and if you are able to pay off the CC before interest
rates spike up again after the balance transfer.  0% balance transfers only last 6-12 months.  The end goal is the same. PAY DOWN DEBT!

I find that spreadsheets make financial choices much easier to comprehend since you are able to modify items and see changes as they happen.

The other nice thing about spreadsheets is that you can watch yourself month by month knocking down that debt and it is very motivational. 
It makes you want to skip that extra lunch out or that soda/coffee you don't need.

If you need help building a spreedsheet let us know.  Either myself or someone else can help.
« Last Edit: August 22, 2016, 08:17:45 AM by EnjoyIt »

merlin7676

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Re: Debt Snowball or Avalanche??
« Reply #4 on: August 22, 2016, 08:12:36 AM »
There is something psychologically rewarding for paying a bill off so I understand your dilemma.
What I did was tackle the smallest bill and work my way to the largest. Every time one got paid off I'd add that to the next and snowball.

Like Sis said, I also transferred over the highest to a 0 % interest for 12 months.

I would suggest you pay the car first as long as you can transfer your CC balance. Then the entire payment for the CC will count towards the principle (and not paying interest). However you must pay it back before the time runs out otherwise they can "back charge" you interest.

Proud Foot

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Re: Debt Snowball or Avalanche??
« Reply #5 on: August 22, 2016, 09:16:56 AM »
Definitely look into the transfer first. If you can do that look at how long it is at 0% and decide which one you want to pay down.  Also how much is your car payment? If with the $1,000 you could get it paid off in a month or two I would probably do that as getting that out of the way should allow you to get the CC paid off if its transferred to a 0% rate.

rocketpj

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Re: Debt Snowball or Avalanche??
« Reply #6 on: August 22, 2016, 11:32:36 AM »
Math is unemotional.  If you can get a zero percent on a balance transfer then do what feels best.  Otherwise pay off the credit card asap. 

This site is all about long-term thinking.  Take the $55/month in interest you are paying on the credit card and think out more than a few months.  Once you have paid it off (and it will be less than $55 almost immediately), the long-term savings will snowball.

Honestly, if the car loan is zero percent you should be making the minimum payment and investing the difference (once you have paid off the cc). 

Doing a back of the napkin (and assuming you never make another payment on your credit card), assuming an annual 7% return if you were to invest the $16 difference in monthly interest charges, you would save/earn $2956 over ten years by putting the one time cash on your credit card.

Of course, if you pay off the card sooner then you will make even more (and lose much less in interest payments, further building your snowball).  If you put your savings into tax advantaged accounts it snowballs even faster. 

So, you can put it on your car loan and feel some satisfaction, or you can put it on your credit card and make - at a minimum - $3000 over the next ten years without having to work for it.  I don't know what your car payment is, but you should pay the minimum and let it run itself out.

Note - none of that works unless you actually invest the difference.
« Last Edit: August 22, 2016, 11:34:13 AM by rocketpj »

ender

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Re: Debt Snowball or Avalanche??
« Reply #7 on: August 22, 2016, 11:42:11 AM »
Quote
Debt Snowball or Avalanche?? 

Yes.

Pick which one you are most excited about. Then do it.

The reality is in your situation which you pick is far less important than aggressively doing the one you pick.

Catbert

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Re: Debt Snowball or Avalanche??
« Reply #8 on: August 22, 2016, 11:51:00 AM »
I understand the psychological importance of paying off debt.  If you have lots of relatively small debts it can be psychologically empowering, plus cash flow enhancing to kill them off regardless of interest rate.  In this case, however, the amounts owed are relatively similar while the difference in interest rates is staggering.  Pay off the cc unless you can figure out how to transfer the balance to a 0% interest card.

snogirl

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Re: Debt Snowball or Avalanche??
« Reply #9 on: August 22, 2016, 01:44:49 PM »
Congrats on saving up to pay off debt!
In my experience (just paid off 45k in consumer debt in 2 years) and since you asked ~ I would
1. Put the thousand bucks on the high interest loan immediately.
2. Pursue a 0% transfer card
3. Pay your normal car payment until the 20% interest rate is moved to 0% card.
Pretty much what many members said above.
I will add that what I found very rewarding is setting up a way to TRACK my debt pay down.
I used Return to Zero.  It was free and all I did was track my progress and I didn't wait till I saved up. 
Literally every single extra cent went to my mind numbing soul crushing debt.  I paid early and often even if it was 10 bucks.
Online you can pay as much as you want and as often as you want.
What also helped me was to stop spending and cut the fat. 
I know this is way more than you asked but hair on fire debt requires fire hose changes.
good luck

nereo

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Re: Debt Snowball or Avalanche??
« Reply #10 on: August 22, 2016, 01:53:03 PM »
Good advice here already. This is a 'hair on fire' emergency and you need to pay down that debt pronto (and use a 0% transfer if available)

One question that hasn't been asked is what circumstances led you to have ~$6k in debt, more than half of which carried an obscene 20% interest rate?  Have you addressed the problem that put you in this situation to begin with?

slugline

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Re: Debt Snowball or Avalanche??
« Reply #11 on: August 22, 2016, 01:54:24 PM »
Quote
Debt Snowball or Avalanche?? 

Yes.

Pick which one you are most excited about. Then do it.

The reality is in your situation which you pick is far less important than aggressively doing the one you pick.

I agree with this sentiment. Also important is whether the OP has been cured of any spendy habits that may have needlessly created the situation in the first place.

kenaces

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Re: Debt Snowball or Avalanche??
« Reply #12 on: August 22, 2016, 01:59:03 PM »
20% > 0%

no brainer

HPstache

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Re: Debt Snowball or Avalanche??
« Reply #13 on: August 22, 2016, 02:09:42 PM »
I'm a huge advocate of the debt snowball method, smallest to largest.  But in this case, you'd be insane not to pay off your  C.C. first.  They're so close in value, why wouldn't you?

halseyskates33

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Re: Debt Snowball or Avalanche??
« Reply #14 on: August 22, 2016, 03:27:59 PM »
Thanks for all the replies!

Let me answer some quick questions

1. My car payment is $300 a month
2. No I do not use it anymore. I love my frugal life

The only question I have is that when I called the CC (TD Bank about doing a transfer they said the max they could do was a 1 time $500 transfer).

Do I need to apply for another CC? If so, does anyone have any recommendations? (My credit is around 720)


nereo

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Re: Debt Snowball or Avalanche??
« Reply #15 on: August 22, 2016, 04:35:20 PM »

The only question I have is that when I called the CC (TD Bank about doing a transfer they said the max they could do was a 1 time $500 transfer).

Yes, you will need to use another CC.  Tranfer the $500 that you can to your TD card, and then open up a second card.  THere are literally dozens, but find one that will give you at least 6 months (preferably 12) at 0%.  But be warned!  Many cards will charge the full interest for any unpaid balance after that introductory period is up... so if you have $1,000 left after the 6 month period you'll be charged xx% for the full 6 months.  Others are more forgiving, but read the fine print and pay it off before the period is up.

kayvent

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Re: Debt Snowball or Avalanche??
« Reply #16 on: August 22, 2016, 05:56:48 PM »
Debt snowball is useful if you have dozens of debts to decide among. For just two, go for the CC. Going for the CC allows you to increase your cashflow sooner. It is deceptive because the CC's minimal payment is not designed for you to pay down the principal whereas a loan is.
« Last Edit: August 22, 2016, 05:58:55 PM by kayvent »