Snowball Method vs High Rate Method

Just like many of you, I’ve got student loans to pay. Between my wife and I we owe about $140,000 (we both have bachelors and masters degrees). I owe $100,000 and she owes $40,000.

Our repayment calculations are a joke. My loan has an interest rate of 4.88% and Vania’s are at 6.25%. If we were to make the minimum payments every month, we would end up paying nearly DOUBLE what we currently owe in 25 years!!! First of all, there is no way in hell I’m going to pay all of that interest.

HA! 

ha.jpg

If you’ve got debt you understand exactly how I feel. Well, enough of the pity party and lets get to work and do something about it!

Rule #1. Stop adding more debt to your credit profile! If you’re on a journey to become debt free, stop adding more debt.

Rule #2. You’ve got to be mentally prepared and hold yourself accountable (related post about financial accountability).

Rule #3 You’ve got to be able to make more than the minimum payments! If not, these strategies won’t work. If your cash is tight, I recommend you reevaluate your budget and cut the fat by living below your means. The short term sacrifices will pay off!

OK- are you ready? Here are the 2 strategies: the snowball method and the high rate method.

Snowball Method

This means that your extra payments will be prioritized based on your debt balances.  Make a list of all of your debts from lowest balance to highest balance. After you’ve made the minimum payment for all of your debts, then you will use your extra cash towards your smallest balances first. Once you’ve paid off the account with the lowest balance, don’t use it again! Remember Rule #1!

The money you were using to make extra payments to the first debt you paid off will now be used for the next smallest balance. Keep following this strategy and you would have created a “snowball effect”…see what I did there!?

High Rate Method

For this strategy, make a list of your debts but organize them by highest interest rate. Just like the snowball method, you will make the minimum payments to all debts but your extra payments will be made to the account with the highest interest rate. Depending on your debt balances, this method could potentially save you the most money in the long run because you are getting rid of the most costly debts you have.

The bottom line

If you’ve read my other posts, you’ll find a common theme…to make this possible you have to create a plan to live below your means and to stay within your budget. Making extra payments to your debts sucks and you may feel like a slave to what you owe. I get it. That’s kind of how I feel with my student loans.

However, if you’re like me, you’ll do anything possible to become debt free. Not motivated enough? Do this…contact all of your lenders and ask them what the repayment calculation will be for your debts.

Are you willing to give your hard earned money to the banks for interest on your debts?

oh-hell-no--meme-45314

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