Back in December 2020, I decided to ask my finance counselor to come up with a plan to help me repay my debts. Since I’m living on my own for the first time in my entire life, and I had never taken care of my household finances (my ex was in charge of that), I maxed out my credit card, and I was struggling to make ends meet. Now, it’s been 5 months since I started my journey. I thought I’d give you an update on how I’m doing, and maybe encourage you to start your debt repayment journey too!
Starting point in December 2020
- Credit card: $6,000
- Line of credit: $5,000
- Loan for new washer/dryer: $1,618.10
- Personal loan 1: $2,500
- Personal loan 2: $2,285
Update as of April 2021
- Credit card: $5,000.03
- Line of credit: $1,847.91
- Loan for new washer/dryer: $1,270.62
- Personal loan 1: PAID OFF!!!! WOOT WOOT!!!! (in March 2021)
- Personal loan 2: $1,710.50
How to prioritize debt repayment
In a previous blog post, I explained that one technique to pay off debts is called the Snowball technique.
Basically, you start by paying off your smallest debt, then you move up to the largest one.
My finance counselor doesn’t recommend that technique. Her reasoning is logical: while you pay off smaller debts, you are not working on repaying the ones with the highest interest rates, which costs you more money in the long run (also known as the “Avalanche” technique).
The Avalanche technique
For example, if you focus on a debt with 0% interest instead of your credit card with a 20% interest rate, you will pay a LOT of money on interests for a longer period.
As I explained in the post about the Snowball technique, do whatever makes you motivated. I absolutely agree that you should logically focus on the debts with a higher interest rate but I do think the Snowball technique lets you achieve smaller milestones more quickly, which could help you stay motivated.
It’s okay to ask for help
At the end of the day, you are the one that knows your relationship with money best. If you are feeling overwhelmed with your debt repayment, ask for professional help. There is NOTHING WRONG with asking for help.
Paying off my line of credit vs my credit card
My credit card has a much higher interest rate than my line of credit (19.99% vs 7.11%).
Logically speaking, as I am using the Avalanche technique, I should be focusing on my credit card.
However, in my particular case, I had to focus on the line of credit because it’s under my ex’s and my name. In our divorce agreement, since I was the one using it, I have to pay it off. This is the reason why I’ve focused on getting rid of the line of credit first.
Apply extra money to your debt
I have to specify something: I managed to lower my line of credit that much because I got a bonus at work. Instead of spending it, I decided to apply it on my line of credit to lower the amount faster.
Call it luck or whatever your want. However, if you do get an extra amount of money, whether it’s from monetizing your side hustle, or getting a bonus, apply it to repay a specific debt. It will give you an extra boost of motivation towards your goal!
If you want tips about managing your credit card, read this post!
Start YOUR debt repayment journey today!
It’s never too late to start getting rid of debt. If it is too much for you, speak with a finance professional.
Grab your Debt Countdown spreadsheet for $7 right here!
I initially created this spreadsheet for myself but I decided to share it with you to help you with your own debt repayment journey.
Start by listing every single debt that you have. This will give you an overall idea of how much you owe. Yes, it could be scary. But you have to face it to create your repayment plan.
Every time you reimburse an amount on a debt, write it down in your Debt Countdown spreadsheet. You will be able to track your progress and feel more motivated!
It won’t be easy
Use the avalanche technique or the snowball technique, or ask a finance professional to consolidate your debts.
It will be difficult. You will need to adapt your lifestyle to focus on paying off everything. But you can do it! I believe in you!
Plus, if you budget your expenses, you should include an amount for miscellaneous expenses, like ordering food or buying a new computer. It’s all about proper planning!
I knew about the snowball method, but not what the avalanche method was called.
It’s tough because I feel hyper-motivated to pay the lowest cost, even if it isn’t the highest interest. Then I will have more I can spend on the next one.
The avalanche method makes more sense because of how interest compounds, but I feel it will take longer to SEE progress.
Anyway, thanks for the tips.
I will figure out what I am doing, snowball or avalanche, one day.
Honestly, doing something is better than doing nothing! I know it makes sense to pay off the highest interest rate debts first but if you feel like paying off a smaller debt first to give you the push you need, DO IT! You got this!
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