Welcome to the Strategic System Module
Press Play to watch the video and read the information below to get started.
In this section, you will:
- Compare Snowball vs. Avalanche
- Order debts
In this segment, I will teach you about two highly effective strategies to eliminate your loans. Both strategies will accomplish the same goal and focus on paying minimums on all debts except for one focus debt. All of your “extra cash” from the Budgeting Blueprint should go directly into your focus debt. Once each focus debt has been paid off, you will take the money that was poured into the focus debt and transfer it directly to the next debt in line. The money spent on the focus debt will continually increase because you are pouring the money from the previous focus debt and the minimum from the new focus debt simultaneously.
Many people debate which strategy is the best, but ultimately, it’s a matter of personal preference. The biggest difference between them is how you organize your focus debts. The best strategy to paying off debt is whichever one works for you. You need to decide which method that is.
The Snowball Strategy
The first method I want to share with you is the Snowball. This method was coined and made famous by the financial guru Dave Ramsey. This is also the method that I used to get rid of my $32,000 of debt. The snowball method requires that all debts be ordered from least to greatest. First, begin by sending all of your “extra” money into paying the smallest debt. If you pick up more income throughout the month, it has to go into the smallest debt. Once, the smallest debt has been paid in full, take that money and add it to the minimum payment of the next debt. Take a look at the images. Image 1 reflects the person’s minimum payment on their smallest loan is $25, but they are paying $125. This means that they found an “extra” $100 a month after budgeting. The entire $100 is paid to the smallest debt until it’s paid in full and then transferred to Debt 2. As you can see, the amount that is paid to the smallest loan continually grows as it acquires a new debt. This is where the term snowball comes from.
|Debt/Interest Rate||Debt 1 ($1,000/4.6%)||Debt 2 ($2,000/3.8%)||Debt 3 ($3,000/5.2%)|
|Debt 1 ($1,000/4.6%)||Debt 2 ($2,000/3.8%)||Debt 3 ($3,000/5.2%)|
|Actual||Paid in full||50 + 125.00 =175.00||80|
Take note that the interest rates are irrelevant while using this strategy. The snowball method is extremely effective because of all of the small wins. Small wins give the debtor a sense of accomplishment and a boost of energy to tackle the next debt in line because they feel successful. The feeling of success is the biggest motivating factor that exists. If you value smaller and faster wins, this strategy is for you.
The second strategy is the Avalanche. The biggest difference between the Snowball and the Avalanche is the way in which debts are ordered. The Avalanche method requires that you tackle your debts from greatest to least by interest rates. Mathematically, the Avalanche is the fastest way to becoming debt free. In the long run, you will pay back less money and do it faster than if you were to use the Snowball. Some of you might be thinking, “Why in the hell would someone use the Snowball, if the Avalanche pays less faster?” It goes back to what type personality you have. If less and faster is more important and you have patience, run with the Avalanche. If smaller motivational wins will help you stay on track for the long run, go with the Snowball. The choice is yours.
Order Debts (Playbook)
In this section, you will:
- Order your debts
It’s time to organize your debts into a format that will allow you to prioritize repayments. After you have decided which strategy to use, gather a list of all of your debts. This should include mortgages, student loans, medical bills, credit cards, and anything else you owe money to. Insert the debts into the Debt Diagram on the Budgeting Blueprint based on the strategy you have chosen (Snowball/Avalanche)
After you list your debts and interest rates using the Debt Diagram. It’s time to Execute the plan.