The Two Easiest Ways to Pay Down Your Debt | The 3-Minute Guide
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- Опубліковано 25 сер 2024
- Broke Millennial breaks down two of the most popular debt repayment strategies and how they can work for you. Looking for tips on paying off student loans? Check out this video: • How To Pay Off Your St... .
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My student loan debt monthly minimum is $794. Unfortunately when I moved last year, my budget got a little out of wack with new expenses and a higher cost of living due to the new area and so now I also have credit card debt. I've been using the avalanche method because I can be very motivated by the math of it and persisting through what seems like forever paying off higher interest debt. Can't wait to pay off my 2nd credit card and funnel all of that extra money into my student loans.
For those of you getting a windfall via tax refunds, definitely consider putting it toward your highest interest debt, if your debt is low enough or the refund high enough you may be able to wipe out one source of debt (that's what I did).
Also, as TFD has recommended in the past, do call up your credit card company and ask if they'll lower your interest rate, especially if you've recently increase your income. It worked for me with Capital One.
Excellent tip with calling up your cc company and seeing if they'll lower your interest rate. Every little bit helps! Glad to hear you found a method that works and are working it. It might feel like it takes forever, but it sounds like you'll have it under control in no time.
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I'm so grateful I don't have any student debt. Working through college was stressful but made it so worth it. Still helpful advice!
I'm with you! I graduated debt free as well (the outlined debts above are fictional for the sake of explaining how the systems work) and it was very much worth going to the college where I got scholarship money and all the work I did during school and during summers. My fiancé does have student loans that he's "avalanching" and once we're married we can avalanche even harder because I'll put some of my money towards the debt as well!
Erin Lowry Never help a man
@@Trailblazers323 it sounds like you’ve been burned. Your comment was fours years ago. I hope you’re healing.
I’d love if you could do a video about whether grad school is worth it financially, especially for those in industries where a masters degree isn’t a requirement/linear path from undergrad. Likewise, if you could talk about graduate certificates/individual classes as alternatives and if the cost/benefit is worth it instead of a full masters degree, that would be awesome. Thanks!
Great idea! I'm a walking case study for this topic. ;)
I did grad school on my own and am now doing a certificate partially on the state's dime. Certificate is much more worth it and less time/$ consuming. Just my opinion.
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Getting out of debt is all behavior based. If it was all math based we wouldn't put ourselves in so much debt. But she's right, which ever method works best for you is the way to go as long as it's effective.
Amen! A lot of folks want to discount the behavioral aspect of personal finance, but we just can't. It's one reason I like being able to present more than one solution to a money problem.
I'll have to agree. I think for some people they can swap between the two . Once a behavior threshold is reached the person could switch to the avalanche method.
pmexplore - That's an interesting way to work the process. Start with the snowball and swap to the avalanche once you set your behavior in place about debt and living below your means. I like that view point.
Me too!
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I wish TFD was around when I was in my 20s. Now 54!
Hopefully it's still helpful! :)
Erin Lowry Yes!!!!
I'm 42...and yes agreed 😊
Only one to go using avalanche. My brain works on math more than dopamine 😂
It's so interesting how the math is super motivating for some and others really need that little win early on to keep going. I'm motivated by math myself, but I am an uber-money nerd!
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I like taking advantage of balance transfers too. If you get a good credit card that has an intro offer for 0% & 0 fees on balance transfers, you can transfer a high interest card balance to the 0 one and pay the same balance with no additional interest or fees. It’s worked before and I like it
I believe the secret is you have to care while you are in your 20s. I didn't. I am debt free now but a very low credit score. Though it is slowly rising!
But caring at any age is important too! Sounds like you're taking control, which is great!
I really wish I started caring sooner. But hey after a few years I now have a score in the mid 700s and have learned how to manage my money a lot better. You can do it!
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Please make a video about the best loan consolidation servicers for those with varying credit scores/income.
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Personally I found it most motivating to pay off my largest debt first. Because after it it gets easier and easier to make progress and ticknthose debts off. Now debt free since 2012 👍
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'm so grateful I don't have any student debt, in Costa Rica is really cheap.
monica velarde It is free in Danmark :D
That's so great! Student loan debt is a huge burden for so many folks! All the debts in this video are fictional for the sake of explaining how they work. I too managed to graduate debt free, but my fiancé has student loan debt so it's something I think about a lot. He's been doing a great job of paying them down already and then we have a plan in place to pay them off quickly and efficiently as a team after we're married.
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Hey just wanted to thank you for the awesome advice you gave me in the comments of the last video about Haven's savings interest rate.
Happy to help!
super helpful as always! :) Always look to your videos for inspiration on my own channel!
Thanks, Christina! Glad to hear you found it helpful.
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I have two debts: credit card and student loan. My credit card debt is not much but I haven’t paid it in months (I know that’s bad but it’s a foreign card which means transferring money to that account is difficult). Decided to pay it off with my next pay check and then pay it off every month so I don’t have to worry about it. And then I’ve found a way to pay back my student loan in half the time it’s due. So I’ll start that soon as my credit card is paid off
Why not discuss getting a credit card with a 0% interest period for balance transfers?
The snowball makes the most sense because it gives you hope and you can quickly gain momentum. My problem is that I’ve only got a house and a car loan. Both seem so out of reach to finish with the snowball anytime soon :( I’ve done a lot of videos on credit card interest because we need to understand it and stay away. Especially store cards like banana. They have the worst interest rates by far
Focus on the car! Your house is (in general based on history) going to go up in value, while your car is depreciating in value.
Here's a tip you're probably not going to like: sell the car, then use the money you get by selling to buy a used car. Save some more money, sell that car, then buy an even better car. Keep going until you've got yourself a nice $10,000 car.
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One thing that can be done to make the avalanche more motivating is to use a repayment calculator, figure out exactly when you will pay everything off if you keep to plan, and then start a count down. Every day you are one day closer to being debt free. Don't even worry about the debt balances, just count down the days/weeks/months until you are done. It may be a lot easier to think about it in terms of time left instead of how many accounts you have left.
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I think I'll go with the snow ball methods but still layout all of the interest rates for my different student loans. The math way would probably be better, but I know myself, and being responsible for paying several different sources is more likely to trip me up.
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I recommend a website called Powerpay.org. Once you enter your debts it will create a amortization schedule for the different methods and you can see which method is actually cheaper for you in the long run.
Very good advice. As Always, thank you
Thank you!!
I like these shorter videos much more than the 15-30 minute videos by TFD
Not sure how this works worldwide, my experience is in Brazil only, but as a rule of thumb banks make their money in large part from your interest rates. if they can consolidate your debts from various sources, the profits from those debts go to them. I had several small-ish debts across multiple sources. I contacted my bank (which was the lowest interest rate one) and got them to lend me enough to pay off all the other debts. Unified and simplified. May require some fine-tuning if your lowest rate option is not a bank, or willing to lend you at the same rate.
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One thing that helped me was freezing my credit card that way if I ever got the urge to spend it would never work because it would be frozen and unusable.
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This space that you are filming oddly enough looks exactly like the WeWork location in Harlem, NY lol
Great video. It's very informative
This is awesome, and reassuring to know I've been doing it the way I'd prefer (avalanche). You should show ALL the numbers over the course of paying everything off, so people can see EXACTLY how long it takes, AND how much you're REALLY paying, especially on the higher interest debt.
Glad to hear avalanche is working for you! The debt examples in this video are fictional (I don't have debt), but I agree that it is helpful to watch people's specific journeys and see how long it does take and what the numbers look like as you keep chipping away. Given that it's just three minutes, I decided to keep it simple.
Good call, haha. :) I remember my Finance professor giving us scenarios of numbers and having us guess which accrued more interest over certain amounts of time. So interesting!
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This really helped! You guys rock.
Most expensive minimum payment first. Save up one entire balance. Spend $2,000 to put $120/m in your pocket. Then you can make that back in a few months until you save up for that next most expensive minimum payment.
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You guys always give us great advice/tips! Thank you so much 🙂
Thanks, Neo!
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Great video this week, there is a lots more solid info only this time!
We're finding our feet for sure and I think you'll see the videos start to be more on the technical side instead of emotional as it progresses. I personally enjoy being able to break down a topic like this in a short time and it seems to be resonating!
Erin Lowry - Perfectly done!
Very informative! Both methods seem to be great👍🏼
They are indeed because they both work!
Thank You. I can't believe I didn't think of this.
Curious what the final difference in total payments would be between the two methods (assuming minimum payments and no additional card usage).
Here is a great break down of the difference between the two with real numbers: www.magnifymoney.com/blog/pay-down-my-debt/much-money-debt-snowball-method-costing92943682/
Erin Lowry Thanks, Erin! It seems to me that the happy medium (besides not having debt in the first place) is somewhere between the two methods with an emphasis on eliminating the “worst” debt first (ex: family loans before credit cards/auto loans on current vehicle before student loans and interest-free medical debt).
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yes! thank you. very helpful!
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I guarantee this will help tons of people!!
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i have around 9,000 of student debt, a 700$ debt at virgin mobile for my cellphone unpayed and a 600$ from a credit card.... i'm thinking about using that method. I know it's wrong.. but i never bothered cause i was like ''i'm going to pay it when i get the money'' .. I soon realized, that it's better to make small payments on the long run .. then to wait for a big paycheck...
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When you're paying down debt like this, how much would you recommend having in your emergency fund? I saw someone said 1,000 (I think on a Dave Ramsey page), but I've also heard 3-6 months (which is WAY more than this). Thoughts? I want to put everything "extra" into my loans outside of my emergency fund and budgeted bills/spending allocations.
This is one of those questions that comes down to personal finance being personal. I've actually posed this question to lots certified financial planners while working on my second book and even their answers range from $0 to 6 months. With that being said, I would consider your own risk tolerance. How comfortable are you with the idea of only having $1,000 if everything went wrong all at once (e.g. you lost your job and a tire blew out on your car and you needed to go to the ER)? What other options do you have if everything goes wrong? Some people can fall back on family for short-term support or have access to a low-interest rate loan. Others aren't so lucky. I pose these questions, because I don't feel there is a perfect rule of thumb. Personally, I don't think the $1,000 buffer is bad advice by any means, but I'd rather see a little bit more wiggle room (e.g. 2-3 months living expenses). However, telling someone to save 3 months of living expenses WHILE paying off debt can feel so overwhelming and out of touch it essentially kills their motivation.
If you're comfortable with the amount you have saved in your e-fund and you want to put everything extra towards those loans to crush them, then go for it! And go for it with a specific plan in place so you are making the most of your extra payments. I'd just recommend that you have spent time thinking through what you can do to further safe-guard yourself in a worst case scenario situation if you don't have a ton of padding in your emergency fund.
I think one layer to this is that many people do not even have a $1000 saved right now. And if they are living paycheck to paycheck, it might take a long time to build up to $1000- maybe up to 4 or 5 months. So $1000 would be a great goal for someone in that financial situation because otherwise saving 6 months of expenses would take forever, and they would never get to the paying off debt part.
However let's say you already have 6 months expenses saved. Do you have liquidate the extra so you only have $1000 in your emergency fund? That would be personal preference. Many people have success doing this...personally I like having more.
The personal finance world got rocked just a couple years ago with Fed Reserve data showing 47% of respondents wouldn't be able to cover a $400 emergency without borrowing money or selling something, so you're certainly right that plenty of people are in a tight paycheck-to-paycheck cycle without $1,000 saved. $1,000 does feel more attainable than 3-6 months living expenses and is a good starting point.
Real quick to clarify with the Dave Ramsey thing. His "Baby Steps" say to begin Baby Step 1 with a "starter emergency fund" of about $1000 while you are paying off debt. Once you are debt free except a mortgage (BS2), you then up your savings to the 3-6 months range (this is Baby Step 3). The reason of keeping a small EF at first is to make sure you are scared and need that debt gone asap. We personally kept ours at $4000 for Baby Step 1 (I'm from Alaska, emergency trips home are very expensive and unfortunately this DID happen while we paid off debt). We paid off the debt, and now we have the 3 months saved. Many Dave followers will say "ONLY $1000" but if you actually listen to Dave Ramsey, he mentions to several callers on occasion why it would be okay to have a higher EF in the beginning including reasons like what mine were. Hope that helped a little! I definitely don't think Dave Ramsey is the only way, but finding his program is what helped kick us into gear!
Hi everyone,
Thank you so much! This is great advice. I put $600 aside every month into my emergency fund-- I'd done so for about 5 months, so I took everything over $1k and put it into one of my smaller student loans (snowball). However, I do feel personally (living where rent is $900 alone each month in CA) that $1k in an emergency fund is nothing. I will keep mine more like $4k from now on like you did, and put anything above that into my loans. Luckily, my bf of 10 years has a decent savings and therefore I can be a little "risky" without too much absolute fear behind it. We are also looking at investing to help us build a little wealth while I try to pay off my loans, since we are so young it actually could really benefit us long term despite me chunking away at my debt. I had 65$k in debt as of yesterday, $59k as of today. I'm a third grade teacher at a Title 1 school and I'm working hard at it, someday hoping to be in adminstration or instructional coaching (I have an MA in teaching). Thanks for your help, everyone!
Hi, I love your videos and I had a question/request for advice. How do you find a job that will pay for your medical expenses if you're medical expenses are really high because of chronic illness and your chronic illness prevents you from being able to do a normal full time job?
out of the now 7 total collected Navient loans I have. the highest balance also has the highest interest rate. 28,530 @ 9.25% while my lowest is now 700 @ 6.8%. The others are 1400 5.6%, 2400 6.8%, 3000 6% 3200 4.9% 5300 5.2% ... are you about to advise that I should start attacking the large one and let all these tiny ones accrue interest over the space of time needed to pay off the large one? The avalanche only works if you can stay focused and have similar balances with interest rates.
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This channel always seems like it is getting close to being fantastic but isn't there yet, I really wish you guys would just get that little bit better. In this video for example, the graphics don't quite make sense, since you still left the column headers as "minimum" payment and didn't resize them or anything it would have made much more sense to add a + whatever amount you are paying above minimum, next to the minimum. The script could be a bit better also but I don't have nearly as specific advice, it just feels like you haven't hit on a real style of your own yet. A second camera angle (but that of course increases costs) or even just some sort of movement to simulate that with a single camera (even just between different parts so you can do it all with one person still), would also help production quality IMHO.
I hope I don't seem like I'm just complaining here, I really just want to like the channel more than I do, partly because I haven't found a comparable one which I like any better.
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Unless you have a super small balance on various accounts and can knock off having to pay multiple monthly minimums, it doesn't make sense to do anything other the avalanche method. Saving money over a long period of time > feeling good that you cleared off one debt.
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Thank you for the helpful advice and making the math behind it less scary!! I´ve also had a question about skillshare: is there any way to pay for it with a debit card, because I don´t own a credit card.
Love your content!
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Love the advise! Just wise it was presented a little slower
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Coming up with multiple sources of income is super helpful when it comes to paying off debt. You have to look at the opportunity cost of things as well. If an amazing opportunity pops up to travel somewhere, sometimes you've got to plan for that at the same time of paying down debt. Sure, you don't get the debt paid off sooner, but at least you're able to save money for the wonderful travel opportunity while still paying extra to your student loans, as well as not gaining more debt. So for me, I'd rather work on my extra income for a year and a half to pay school loans faster and be able to travel (with saved money), than to work just a year and get all my debt paid off and not travel. It's all about the opportunity cost. I would, however, never recommend traveling via even more debt. SAVE so your vacation doesn't follow you home!
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make that student loan 120k with 6.8% 😂
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Nice segue.
Great video. I love your channel.
Thank you!
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I have a question, so I’m 21 and I am trying to build credit. I don’t have a credit card (shocking, I know), but I do have student loans that I’ve been paying on since I graduated college in May. I also have a car loan that I just got last month (out of pure necessity, I drive 90 miles a day for work). I tried to go solo with the car loan, but banks wouldn’t lend me money without a co-signer due to lack of credit. My credit score is in the upper 600s. What do you recommend I do to build credit? I’m planning on renting an apartment next year and I’d hate to be turned away because of my credit score/lack of credit.
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You make everything sound so easy and simple. Thank you. I love that. Can you talk about government job's? I recently read that if you work for the government for 10 to 20 years and pay the minimum balance on your student loans, your loans can be forgiven. Is that true? Because I'm thinking about going to grad school. Does it hurt your credit to only pay the minimum?
Thank you. Love you videos.
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Debt snowball -> follow Dave Ramsey
Debt avalanche -> follow Suze Orman
How can I work on paying off child support back pay plus my month child support payment?
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I'd argue that if you can scrape $30 out of your budget, you can probably ALSO add $40 of income--that's just $10 per week. That gives you $70 to leverage against a debt. Furthermore, if you've been consistent in your payments, you might qualify for a consolidation loan or line of credit (which is typically around 7% APR). If you then applied a combined payment against combined debts at a lower APR, that $14,200 at 7% APR, that $310 (current payments + $30 scraping +$40 add'l income) would pay off the debt in 54 months--assuming that you don't apply any windfalls towards the payment, nor accumulate more debt. If you stuck to the minimum payments on the student loan while paying off the others, you're still looking at almost 8 years in debt.
It's true about probably being able to get a little bit more, but these are all fictional debts and numbers. (I'm actually debt free). I just used them as an example and created amounts that felt easily accessible to folks to reallocate.
And as I mentioned on another comment, consolidation should be a last resort. It will close your credit accounts, reducing the highest factor determinant of your credit score: available credit. Work with your debtors first and take the long road rather than the shortcut if you can afford to.
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You guys should partner up with Self-Made Millenial! Her channel is relatively small right now but it deserves all the views!
Thanks! We'll be sure to check out her channel.
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What happens if student loan debt has been in default for years and I don’t think (he) will EVER be able to make any payments?
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Checking at debt consolidation when you have interest rates as high as 25% is quite a no brainer, too...
Refinancing, balance transfers and debt consolidation are all options could certainly be standalone videos. 3 minutes means I can't address each individual option, but those are certainly contenders for solo video topics.
Of course, and you shouldn't have to! I just met so many people who did not know about this particular option, and were working so hard on paying those high interest rates that I thought I'd mention it here.
Appreciated! Another commenter also mentioned the option of calling your credit card company and seeing if they'll lower your interest rate. Obviously no guarantees there as they're certainly not incentivized to do it, but hey, if it even goes down a percentage or two that's something! I'm also a fan of the balance transfer for folks who have cc debt because of an unexpected medical/housing/auto expense. It's only a good option if you're not going to be tempted to incur more debt, but if that's your case then you cant beat 0% APR during a promotional period. However, you gotta know the traps like deferred vs waived interest and not spending on the BT card. Hmmm, the more I type the more I think this should be a video soon!
Consolidation will effectively close your credit cards, damaging your credit score in the process. The loan will also appear on your credit as a consolidation and hurt your ability to secure an apartment or vehicle loan. Work with your credit card companies as much as possible first. Consolidation should be a last resort, just like bankruptcy.
There are different ways to consider consolidating, which is something that could be addressed in a future video. E.g. getting a personal loan to consolidate credit card debt or balance transfer as opposed to doing the version to which you are referring. You don't have to close the cards when you get a personal loan or, for instance, refinance student loan.
Can I say that i used both if theres only 1 credit card debt?🤣
I wish you didn't have to push Skillshare in every video. 😐
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The one thing with “debt avalanche” that doesn’t work is the interest charge is based off the balance. If I have a 750 limit credit card with 23% interest the interest charge is like 15-20 a month vs a 20k car loan with an 11% interest rate & 200 interest charge..
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Why do I keep watching these video's I don't live in the US XD
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Happy Dance!!! DFTBA
Someone should look at a bunch of people ovver a long time and see which one is the best strategy. Then recommend that one en masse.
That's a good idea in theory, but tough to implement because debt repayment it's so behavioral based (which drives economist crazy!). There are personal finance experts who do advocate just one strategy. Dave Ramsey, for example, just focuses on debt snowball. I like talking about both because some people are truly motivated by knowing they're saving both time money with avalanche, but others will give up if they don't get that rush of an easy win early on with snowball.
Erin Lowry yeah I was referencing DR since that is his justification for snowball. I would love to see some research on this.
And you are right a lot of people don't model behaviour when both giving or listening to financial advice. Which is not good since the people that under stand behaviour profit off those that dont
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@@erinlowry7171 dang I just realized your the rpesenter. thanks for actually responding to me
Is it a good optional idea to using your retirement fund to pay off the entire debt?
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Realistically, the best "math" way is to allocate the additional funds based on your highest interest and balance. If your BR card charges $85 per month in interest, the Discover card charges $60 per month in interest, and the student loans charge $40 per month, you should work the BR and Discover cards down to $40 per month in interest charges then reallocate based on your fastest principal payoff.
The issue with mathematically focusing on just the highest interest rate is that you will end up paying more on your lower interest and higher balance cards once you pay down your higher interest card to a point below the monthly interest charge on your lower interest card. Even the playing field first then eliminate by lowest principal first and snowball those funds into your next lowest principal to maximize savings on interest charges.
Also, as an added tip, eliminate nickel and dime bills. Things like WoW if you rarely play it, or your Hulu subscription if you usually spend more time on Netflix, and snowball those payments into your debt repayment plan.
They hybrid method does work for folks too, but in 3-minutes I just had time to break down the basics of both. For the record, the numbers in this video are all fictional for the purposes of explaining how they work. I'm, fortunately, debt free.
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24% interest?!
Store credit card interest rates are INSANE, which is why I wanted to use one as an example. Lots of folks get into trouble early on, especially when they're younger, because store cards approve people so easily and have atrocious interest rates. www.washingtonpost.com/news/business/wp/2017/10/20/retail-credit-cards-increasingly-come-with-perks-and-a-25-percent-interest-rate/?.580b17c91131
Yup. This is exactly the rate on my Banana Republic store card. I wish I could go back in time and punch younger me in the face.
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Never say the avalanche method is mathematically correct. It's not. If you were doing math you would do the snow ball method. It's easier to pay off $500 verses $10,000. You don't keep more debts around longer and keep paying interest on your debts if they are no longer around. Costing you more money in the long run.
You save both time and money on avalanche if you keep with it, making it the "mathematically" correct approach. The reason I mentioned behavior and doing what works best for you is because if you aren't able to keep going with avalanche because it feels demoralizing, then it won't save you the most most. That's why lots of folks tout snowball as the superior method.
The avalanche is literally always the mathematically correct method because it accounts for interest. Example: If you have a 2% interest rate on a $1000 debt, and a 10% interest rate on a $10,000 debt, you'd be losing "$20 a month" to interest with the $1000 debt, and losing "$1000 a month" to interest the $10,000 debt. The numbers don't lie. You lose more $ to interest when you use the snowball method. BUT that's why this video is so good, because it acknowledges that while mathematically correct, it doesn't always motivate people in the same way.
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😳I don't think I get this? Because I usually pay it off right away. Then again, I don't have debts...
Then you're doing great! The best situation is to always pay off your credit cards on time and in full. Unfortunately, that's not the reality for everyone. This video is for folks who are dealing with debt and wanted some tips on methods to pay it off.
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I thought some tips would come in this video, but not much. And what is annoying that people in videos like these think all people have more then one debt. What if you only have one. Balances or interest rate don't mean a thing in that case.
If you only have one debt then you just but all the extra money you can muster towards that one debt. Every little bit extra about minimum amount due is what helps chip away at the principal balance.
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This is dumb, she misses the key info, ie how many months it would take using each method to clear those debts, how much interest would you pay on each method, and what months would you pay off a debt. THOSE are the facts an individual needs in order to assess the best method for them.
She said that the method which pays it off quickest with the lowest amount paid is the avalanche method (as it gets rid of the highest interest loan first). So if you're going by the mathematically best option, it's the avalanche. If you want to know how long each method would take and how much money you would spend doing each method, you can take what debts you have and crunch the numbers, or take the example in the video and crunch those numbers.
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No, there's only 1 way to pay down your debt. You have to give them money equal to the amount you borrowed plus interest and fees. There's no secret to this, isn't just that simple. To get rid of your debt you have to pay them your money. Period.
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An advertisement for skill share.....SUPER LAME.
Wow this was 1/2 ad 1/2 crap
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