Snowball Method vs. Avalanche Method: What’s the Best Way to Tackle Debt?

Debt is the ultimate killjoy. It can destroy a budget, make long-term financial planning impossible, and shadow every purchase you make with guilt. No one wants to live with that debt burden. But how do you kiss your debt goodbye?

Woman sitting at table working on Phone and laptop.

Crawling out from under this mountain won’t be easy, but if you’re ready to realign your priorities and do what it takes, you can shake off debt no matter how large.

Let’s take a look at two popular approaches for paying down debt and explore the pros and cons of each.

The debt snowball method

The snowball approach to getting out of debt was popularized by financial guru Dave Ramsey. It involves focusing on paying off the smallest debt first, and then working on the next-smallest debt until they’re all paid off.

Let’s take a look at how this would work using an example scenario. Say you’ve squeezed an extra $500 out of your budget to channel toward paying down debt and you have the following debts:

  • $2,500 personal loan at 9.5% interest; minimum payment $50
  • $10,000 car loan at 3% interest; minimum payment $200
  • $13,000 credit card debt at 18.99% interest; minimum payment $225
  • $18,000 student loan at 4.5% interest; minimum payment $300

In this scenario, the snowball method would have you paying just the minimum payment on all debts except for the smallest. On that, you’d put the extra $500 you have toward quickly paying off the personal loan. Once that’s paid off, you’d take the $550 you were paying toward the personal loan and add it to the $200 you’re paying for the car loan. Now you’re paying $750 toward your car loan and you’ll be kicking it in approximately one year. Keep doing this until you’ve kissed all your debts goodbye!

Pros of the debt snowball method

The most significant draw of the debt snowball method is that it works with behavior modification and not with math. The small but quick wins are excellent motivators to keep you going until you’ve worked through all debts.

Like Ramsey says on his site, “Personal finance is 20% head knowledge and 80% behavior.”

It’s not just a nice theory. A study published by Harvard Business Review proved that starting a journey toward a debt-free life with the smallest debt actually does help keep the motivation going until the job is done.

Cons of the debt snowball method

The primary disadvantage of the debt snowball method is its indifference toward interest rates. Paying off the smallest debt first can mean holding onto the debt with the highest interest rate the longest. This translates into paying more in overall interest, sometimes to the tune of several thousands of dollars.

Debt avalanche method

The debt avalanche method takes the opposite approach of the snowball method and advocates for getting rid of the debt with the largest interest rate first and then moving on to the next-highest. This enables the debt-payer to shed heavy interest rates quicker and to put more of their money toward the principal of their loans.

In the scenario above, the debt avalanche method would involve paying down the credit card debt first, followed by the personal loan, student loan and finally the car loan.

Pros of the debt avalanche method

Paying off the debt with the highest interest rate first can save hundreds, and sometimes thousands, of dollars in interest. Some people also like the idea of kicking their most weighty debt sooner. Finally, in most cases, choosing the debt avalanche route will be shorter than the snowball method.

Cons of the debt avalanche method

The debt avalanche requires self-motivation to keep the debt-payer plugging away at the plan despite seeing little progress. It’s harder to feel like you’re getting somewhere when the numbers are barely moving, but for individuals who are sincerely motivated and believe they can stick with the plan until they see results, it can work.

Which method is right for you?

Factors like your personality and lifestyle play a role in determining which of these methods is the best choice for you. If you think you’d need early motivation to keep going, you may want to choose the debt snowball method. Is your chief concern finding an approach that will cost you less time and money? In that case, you might want to go with the avalanche approach.

Before you make your decision, you may want to run your numbers through a financial calculator to see how much interest you’d be paying by using each method and how long each approach will take.

There’s no reason to think you’ll be stuck with one method once you make your choice. You can always switch approaches down the line, or decide early on to get rid of your debt with the largest interest rate first, as per the debt avalanche method, and then work toward paying off the rest in order from smallest to largest, as per the debt snowball method.

Are you ready to tackle your debt? Choose your approach and get started today. A glorious debt-free life awaits! For information on how Destinations Credit Union can help you reach your short term and long term goals, visit us at our website. Destinations Credit Union

The HOPE Inside model created by financial dignity nonprofit Operation HOPE, provides no-cost one-on-one financial literacy coaching, workshops, and education programming to participants through the support of financial and corporate partners. Destinations is the first credit union in the country to offer this service. Credit and Money Management, a core program of the HOPE Inside adult offering, is provided at this location. The Credit and Money Management Program is designed to transform disabling financial mindsets—teaching people the language of money, how to navigate credit, and make better decisions with the money they have.

Your Turn: Have you paid off a large amount of debt? Tell us how you did it in the comments.

5 Ways To Pay Off A Loan Early

If you’re like most Americans, you owe money toward a large loan. Whether that meanscouple working on computer carrying thousands of dollars in credit card debt, having a hefty mortgage in your name or making car loan payments each month, loan debt is part of your life. This means you’re looking at hundreds of dollars in interest payments over the life of the loan(s). There’s also the mental load of knowing you owe perhaps tens of thousands of dollars and that you’ll be paying back the loan for years to come.

It can all get kind of depressing-but it doesn’t have to be that way.

Did you know there are simple, but brilliant, tricks you can employ to lighten the load? With a carefully applied technique, you can pay off your mortgage, auto loan, credit card debt and any other debt you’re carrying quicker than you thought possible. These tricks won’t hurt your finances in any dramatic way, but they can make a big difference to the total interest you’ll pay over the life of the loan and help you become debt-free faster.

You can free up more of your money each month, use your hard-earned cash for the things you want instead of forking it over in interest and live completely debt-free sooner than you’d dreamed. It’s all possible!

A note of caution before we explore these tricks: Check with your lender before employing any approach, as some loan types have penalties for making extra or early payments (we don’t at Destinations Credit Union!).

1. Make bi-weekly payments

Instead of making monthly payments toward your loan, submit half-payments every two weeks.

The benefits to this approach are two-fold:

  • Your payments will be applied more often, so less interest can accrue.
  • You’ll make 26 half-payments each year, which translates into an extra full payment on the year, thereby shortening the life of the loan by several months or even years. If you choose this method with a 30-year mortgage, you can shorten it to 26 years!

2. Round up your monthly payments

Round up your monthly payments to the nearest $50 for an effortless way to shorten your loan. For example, if your auto loan costs you $220 each month, bring that number up to $250. The difference is too small to make a tangible dent in your budget, but large enough to knock a few months off the life of your loan and save you a significant amount in interest.

For a potentially even bigger impact, consider bumping up your payments to the nearest $100.

3. Make one extra payment each year

If the thought of bi-weekly payments seems daunting but you like the idea of making an additional payment each year, you can accomplish the same goal by committing to just one extra payment a year. This way, you’ll only feel the squeeze once a year and you’ll still shorten the life of your loan by several months, or even years. Use a work bonus, tax refund, or another windfall to make that once-a-year payment.

Another easy way to make that extra payment is to spread it out throughout the year. Divide your monthly payment by 12 and then add that cost to your monthly payments all year long. You’ll be making a full extra payment over the course of the year while hardly feeling the pinch.

4. Refinance

One of the best ways to pay off your loan early is to refinance. If interest rates have dropped since you took out your loan or your credit has improved dramatically, this can be a smart choice for you. Contact Destinations Credit Union to ask about refinancing.

It’s important to note that refinancing makes the most sense if it can help you pay down the loan sooner. You can accomplish this by shortening the life of the loan, an option you may be able to afford easily with your lower interest rate. Another means to the same goal is keeping the life of your loan unchanged and with your lower monthly payments, employing one of the methods mentioned above to shorten the overall life of your loan.

5. Boost your income and put all extra money toward the loan

A great way to cut the life of your loan is to work on earning more money with the intention of making extra payments on your loan. Consider selling stuff on Amazon or eBay, cutting your impulse purchases and putting saved money toward your loan, or taking on a side hustle on weekends or holidays for extra cash. Even a job that nets you an extra $200 a month can make a big difference in your loan.

Triumph over your loans by using one or more of these tricks to make them shorter and pay less interest. You deserve to keep more of your money!

Your Turn: Have you used any of these methods or a different approach for paying off a loan early? Tell us about it in the comments.

SOURCES:
https://www.thebalance.com/how-to-pay-off-debt-early-315571

https://www.google.com/amp/s/www.huffpost.com/entry/top-6-ways-to-pay-off-any-loan-faster_b_1624242/amp
https://www.payoff.com/life/money/6-ways-to-pay-off-your-car-loan-early/

All You Need To Know About Wage Garnishment

Q: I have several outstanding debts and I’m starting to worry about wage garnishment.young man looking over bills - concerned What do I need to know? Is there any way I can protect myself if my wages get garnished?

A: Wage garnishment is the process in which funds are deducted from a person’s salary to pay for their outstanding debts

If you owe lots of money, don’t panic; you can prevent a wage garnishment by working out a manageable payment plan with those you owe money to (your creditors). In the event that your wages are garnished, there are steps you can take to reverse the process.

Read on to have all your questions about wage garnishment answered.

How does the wage garnishment process work?

Unless you owe child support, back taxes or student loans, creditors require a court order to garnish your wages. These creditors can include credit card companies; medical facilities, agencies or hospitals; auto loan creditors and more. To garnish your wages, creditors will have to sue you, win the case against you and receive the court order to move forward with the garnishment process.

Once the court order is in a creditor’s hands, they must send you written notification of the wage garnishment at least 30 days before the garnishment is set to begin. The notice must include the following information:

  • Exactly how much money you owe the creditor
  • Instructions for how you can obtain a copy of the loan records
  • Instructions for entering into a voluntary repayment schedule
  • Instructions for requesting a hearing on the planned garnishment

The creditor will then forward a copy of the court order to your employer, who will withhold the garnished amount from your next paycheck. This way, your creditors are getting their due. Unfortunately, that means making do with a skimpier paycheck.

Under federal law, your employer cannot fire you for a wage garnishment. However, if you have multiple garnishments, or a single creditor has garnished your wages for two or more debts, you are no longer protected against retaliation.

How much of my wages can be garnished?

There are strict federal laws limiting the amount of money creditors can skim off your paycheck. By law, creditors of consumer debt can only garnish 25% of your take-home pay, or the amount by which your weekly wages exceed 30 times the minimum wage, whichever amount is lower. Some states have even stricter guidelines and set a lower percentage limit for wage garnishments. When state and federal laws surrounding wage garnishment are in conflict, the law falls on the side that is more favorable to the employee.

Other kinds of debt can have higher maximums for wage garnishment, as detailed below.

What are the most common types of wage garnishment?

The following three wage garnishments are the most common and don’t require a court order:

1.) Child support and alimony

All new or modified child support orders include an automatic wage withholding order.

After the court has ordered you to pay child support, the court or the child’s other parent must send a copy of the order to your employer. The employer is then responsible for garnishing the specified amount from your paycheck and sending it to the child’s other parent. If the court has made you responsible for maintaining health insurance coverage for your child, payments to fund the coverage will be deducted from your paycheck as well.

The amount of money garnished from your earnings for child support varies with circumstance, but it can be as high as 65%.

2.) Defaulted student loans

If you default on your student loan, the U.S. Department of Education, or an agency collecting money on its behalf, can garnish up to 15% of your income.

3.) Back taxes

If you owe money to the IRS, the federal tax agency can help itself to a chunk of your income without obtaining a court order. The percentage of your salary it’ll leave for you varies with the number of dependents you have and the amount of your standard deduction.

To garnish your wages, the IRS is required to send a wage levy notice to your employer, who must provide you with a copy. The notice you receive will include an exemption claim form for you to complete and return.

State tax agencies can also lawfully take a chunk off your salary, though state laws vary regarding how much they can collect.

Can I protest a wage garnishment?

There is always a course of action that’s open to you when you’re the subject of wage garnishment. To protest a wage garnishment, you’ll need to file papers with the court for a hearing date. At your scheduled hearing, you can then present evidence demonstrating that you need more of your paycheck to pay your expenses or that you qualify for an exemption. The judge will then decide to terminate the garnishment or leave it in effect.

Of course, it’s best to avoid having your wages threatened by garnishment in the first place. Once a creditor wins a lawsuit against you, judges tend to be unsympathetic and getting a garnishment lifted can be difficult.

If you’re in over your head with debt, we can help! Call, click or stop by Destinations Credit Union to talk about our debt counseling services and more.  We have recently opened an Operation HOPE Inside office at our Parkville location. The HOPE Inside model, created by financial dignity nonprofit Operation HOPE, provides no-cost one-on-one financial literacy coaching, workshops, and education programming to participants through the support of financial and corporate partners. Destinations is the first credit union in the country to offer this service. Credit and Money Management, a core program of the HOPE Inside adult offering, is provided at this location. The Credit and Money Management Program is designed to transform disabling financial mindsets—teaching people the language of money, how to navigate credit, and make better decisions with the money they have.

Your Turn: Have you ever been the subject of a wage garnishment? Share your experience with us in the comments!

SOURCES:
https://www.garnishmentlaws.org/wage-garnishment-facts/

https://www.garnishmentlaws.org/what-types-of-income-can-be-garnished/
https://www.nolo.com/legal-encyclopedia/if-wages-are-garnished-rights-33050.html

Is It Always Best to Pay Off Credit Cards Before Saving for Retirement?

By Janet Alvarez

image of credit card

Close-up of a credit card

Conventional wisdom says you should pay off your credit cards before saving for retirement. While it’s generally true you should pay off high-interest credit card debt as quickly as possible, there are a few situations where retirement savings should come first. Let’s look at the benefits of each approach.

Benefits of Paying Off Credit Cards First

Credit cards usually mean high-interest debt, and the longer you take to clear it, the more you’ll pay in interest. Here are some key reasons why you should pay off credit cards first:

  • High-interest credit card debt can be hard to make a dent in. If you’re not making more than the minimum payment on your credit card, compounding interest means your balance will barely budge. Even if you never use the card again, you will end up making payments for a long time.
  • If you’ve got credit card debt, your finances might be strained. High credit card debt is usually an indicator that you’re living above your means. You should get your spending and budget under control before investing in retirement.
  • High-interest debt rates are usually higher than market returns. If your credit cards carry a 25 percent interest rate, but a retirement fund is likely to only earn about 8 percent per year in the market, that’s a whopping difference of 17 percent that you’d be missing out on by saving for retirement instead of paying down credit cards.

Benefits of Saving for Retirement While Paying Off Cards

Still, saving for retirement is critical, and there are several reasons why you might wish to do so even if it takes you longer to pay down high-interest cards. Among these are:

  • 401(k)s and other retirement vehicles carry tax benefits. You can contribute to 401(k)s and certain other retirement plans using pre-tax dollars, thereby reducing your adjusted gross income and overall tax burden. This frees up extra cash for other purposes, such as credit card debt repayment.
  • The earlier you start saving for retirement, the better. Delaying retirement savings means missing out on months or years of compound interest. The longer you wait, the more likely you’ll end up pinching pennies in your 50s as you try to catch up on retirement savings. Compounding interest allows even people who never make big salaries to end up with comfortable nest eggs—but only if they start saving early.
  • Saving for retirement builds good financial habits. Socking money away for retirement is not only essential to your financial future, but it also helps you develop better money habits today. In doing so, you’ll learn how to budget better and address the sources of your debt. Plus, retirement accounts are usually difficult to raid (they often carry fees and penalties for early withdrawal). These extra hurdles discourage you from accessing this cash until you actually need it for retirement.

Special Situations May Help You Decide

Deciding whether to pay off credit cards or save for retirement first is a complex, personal issue. However, there are some special circumstances that suggest a clear direction:

  • Your employer offers a 401(k) match. A retirement savings match is free money. Even if you have high-interest credit cards, save at least the minimum required to get your full employer match, or you’re leaving money on the table.
  • Your credit cards have low interest rates. If you’re able to carry or transfer your credit card debt on low or zero percent APR cards, then it makes sense to save for retirement while paying these off, since your low interest rates mean debt won’t snowball quickly—assuming you’re not making new purchases that add to existing debt. (See: When to Do a Balance Transfer to Pay Off Credit Card Debt).
  • You’re age 50 or older. If you’re 50 or older, savings are critical because you’re that much closer to retirement, and have less time to save or allow money to compound. Plus, savers 50 or older are allowed extra catch-up contributions to their retirement plans.
  • You’re buying a house or applying for credit. If you’re applying for a mortgage or other forms of credit in the foreseeable future, you’ll want your credit card balances low, and your credit score as high as possible.

Paying off credit card debt and saving for retirement are both important financial goals. Often, they can even be achieved simultaneously. Regardless of which one you pick, commit today to setting aside extra cash each month to achieve your financial goal.

Janet Alvarez is the news anchor for WHYY/NPR and the Executive Editor of Wise Bread, an award-winning consumer education publication focused on helping consumers make smarter credit choices.