Over the last two years, I have consistently talked about paying off debt. Living a debt-free life is perhaps the greatest gift to your financial well-being.
I wrote an entire series about Staying Debt-Free at Any Age (20s, 30s, 40s, 50s, 60s, 70s), and you can download all the books for free on my website. That is how much I love talking about stress freedom!
Our story. I joined the military at age 18 and started a family at 25. By age 38, I had progressed in the Marine Corps, but we were $77,000 in debt.
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In June 2019, we began taking debt and finances seriously, truly learning how money works. Within two years, we went from -$77,000 to $150,000 in investments. So how did we do it?
The debt snowball. Two widely held concepts for paying off credit cards, auto loans, student loans, wedding debt, and personal loans are the debt snowball and debt avalanche.
The debt snowball is all about momentum. You don’t focus on the interest rates of your debt but on the size of each liability.
Dave Ramsey teaches this method because each small victory boosts your emotional confidence in paying down debt.
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As you pay off cards and loans, you use that new cash flow towards the next smallest debt. Eventually, you will have one sizeable final bill and a ton of cash flow to throw at it.
The debt avalanche. The debt avalanche is a more nuanced approach to paying off debt. The theory is first to pay off the debt with the highest interest rate.
Therefore, if your biggest loan has the highest interest rate, you would start there. The belief is that you will save a lot of money by tackling the highest interest debt first. There is no doubt that you would save a ton of money this way.
My thoughts between the two. I am 100% for using the debt snowball to use your emotional victories to motivate your debt-free journey.
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When we were in debt, we had a $23,000 credit card balance at a fixed 9% interest rate. That was our highest debt total, and the last card we paid off. I couldn’t imagine trying to pay that off first.
I want to walk you through the debt we had before we became serious. We used the debt snowball method and debt consolidation to keep everything clean and smooth. So, let’s take a journey back to June 2019.
Here are our numbers from June 2019, give or take. We became serious about paying off debt because we wanted to retire overseas in Turkey, and debt would hinder our ability to do so.
Debt consolidation. Debt consolidation can be a gift and a curse. If you have your spending under control, it can lower some interest rates and alleviate having multiple cards and loans.
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Ensure you capture all of your debt on a spreadsheet before consolidating. You want to maximize your loan by combining as many things as possible.
A good test is to go 3-4 months without using any credit cards. If you can do that, you are probably ready to consolidate safely. Also, ensure you have at least $1,000 in an emergency fund.
We keep paying down debt. We first started with my smallest credit card, paying off the $2,000 quickly. We paid off some of the miscellaneous debts next.
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We then took out two massive consolidation loans. It’s also important to mention we added roommates during this timeframe. This additional cash flow truly put our journey into overdrive.
In about six months, this is how our totals looked. Now we could get to work on paying these debts down quickly. I believe the highest interest rate was Debt Consolidation loan #2 at 11%,
However, we wanted to pay it down first because it was the smallest. We then continued to grind out the debt payoff. I got a second job working as an instructor online for military courses.
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The final payoff. Once we got down to $25,000, we took a huge step. We were able to refinance our first home and TAP the equity.
We took out $80,000 from the home, increasing the monthly mortgage payment from $1,500 to $1,725. The interest rate on the home dropped from 4.5% to 3%.
We were nervous about taking out equity, but that is why you read books. I was confident that we could rent the home above the cost of our new mortgage.
We received $80,000 in our account. I paid off the remaining balance of our loan and dropped every single cent of the remaining money into dividend-paying stocks. That’s why I am a huge proponent of learning to invest while paying off debt.
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Within a couple of months, we rented the home for $2,000/month, passing along the new debt to our tenants. Again, you must be smart with your money—always seeking a path through the fog.
What I learned on our journey. Dave Ramsey is correct; the emotional reward for paying off each card will motivate your more than interest rate chasing.
I prefer the debt snowball effect because debt is an emotional roller coaster. You don’t know how much debt affects your mental well-being until you are completely debt-free.
When you pay off debt, it’s similar to entering Oz in the movie “The Wizard of Oz.” The world becomes colorful, and you can ask yourself, “what do I want to do today?” Not “what can I afford to do today?”
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Conclusion. Carrying debt is crippling to our mental health and well-being. Paying off debt is an emotional journey from an In-Debt-ured servant to a Financially Independent explorer.
The debt snowball plays into the roller coaster better than the debt avalanche. You can try the debt avalanche if you are 100% in control of your financial lifestyle.
If that were the case, you shouldn’t be in debt in the first place. We got in debt because we didn’t know the game of money (and, therefore, life).
Getting out of debt is an emotional commitment, not a financial one. Thus, the debt snowball will give us the inspirational boosters we need to finish the marathon. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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