How to Use the Avalanche Method to Pay Off Debt
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- เผยแพร่เมื่อ 10 ก.ค. 2024
- You’re gonna pay off debt-it’s official. But how you approach it can greatly impact how much money you pay in additional interest. Learn how the Avalanche Method of debt payoff is the ultimate way to save the most while shaking off that debt.
Learn about the Snowball Method: • The Fastest Method for...
Timestamps:
0:00 Intro
0:25 What is the Avalanche Method?
0:45 Should I Snowball or Avalanche?
1:10 Step 1: Create a Budget
3:01 Step 2: Make Your Monthly Minimum Payments
3:38 Step 3: Arrange Debts by Interest Rate
4:16 Step 4: Send “Leftover Dollars” to First Debt
5:43 Step 5: Pause and Reevaluate
6:56 Step 6: Pursue Next Debt with “Leftovers”
8:04 Step 7: Continue Until Debt-Free!
9:47 What If I Had Used the Snowball Method?
10:58 How to Use YNAB’s “Loan Planner” Tool
11:44 YNAB Win!
12:18 Outro
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I love that you guys advocate for building a cushion and saving for fun things even when you're paying off debt! So many debt strategies revolve around shame and restriction.
Oh, we absolutely do. We would ALL get burnt out if all we were doing was launching every single extra penny we have at debt. We wanna pay off our debt as soon as we can, but we also only have one life-FUN MUST BE HAD! 🥳
🌻Hannah
💯
Can you please do every training video I need for the rest of my life lol. Just think you could like have so much fun training on all kinds of things. Okay okay large request. Can I just say that I have a very short attention span and your videos are awesome!!!! X 100000000. Anyway keep up the great work!
Hana: "We don't go into debt buying groceries. . . "
ME: "YOU WANNA BET??!!!!" 🤣 I have very truthfully done this.
Finally wrapped my head around YNAB, and it has been freeing. For our debt payoff journey my husband and I are using the snowball method to start, because we have several low(ish) balances. Once those are complete, we're going to switch to the "anger" method, lol. I heard about this on one of the Budget Nerd episodes; basically pay the bill that makes you the angriest. I feel like YNAB has given me the confidence to switch things up as I need, and my husband now understands being on a budget doesn't mean cutting out all the good stuff - it means planning for it! Perpetually thankful I found out about YNAB! 💜💜
Oh my word, I lovvvvve this. Thanks for sharing such an awesome story with us! It's hard to wrap your head around a brand new way of dealing with and thinking about money, but once you it's one of the biggest game changers you will ever have. Do you mind if I share this comment as a YNAB Win in an upcoming video?!?! I just love it!
🌻Hannah
@@YNABofficial ty! I don't mind at all 🙂💜
Woo hooo!! Thanks friend! I will do so gladly :)
🌻 Hannah
I've been doing this avalanche method for about a year now and it really works well. I have a slightly different approach though... In addition to the minimum payments, I also throw the interest charges and in some cases I double it -- this was after I'd freed up a lot of funds and fill the budget. And I am able to pay any cards I'm still using each month
"Being debt free IS a beautiful thing"
Been using YNAB for the past 6 years, not only don't have any debt, but during this time: we got married with two wedding celebrations in two different countries, my wife income ceased due to Covid redundancies in 2020, my son was born same year and today we are as stable as day one with one more mouth to feed and one less wage in.
Thank you YNAB!
🤯🤯🤯
Luis. What?! That's INSANE. Oh my word, y'all are YNAB ELITES. Would you mind if I shared this comment as a YNAB Win in an upcoming Heard It From Hannah video?? I'd love to!
🌻Hannah
@@YNABofficial Hey Hannah! Sure thing, please do! 😊 Looking forward to seeing it 😀
Woo hooooo!! Can't wait!! Your story is still blowing my mind even the next day 😂
🌻 Hannah
I'm a snowballer for the psychological momentum (each tiny debt payoff makes you feel so good!), but realized my interest rates were all pretty comparable. I can see how avalanche is a good idea in the scenario in the video. Now, what would you call what my husband and I used to do, which was pay off the debts with the highest monthly minimum payments first in order to free up cash? Before YNAB, we barely made it to the end of the month with $$ in the bank, so freeing up more each month was a huge motivation.
This approach is used by many. Personally, I chose the Dave Ramsey approach. Pay off debt with the lowest balance first. Then hit the next lowest balance by adding the extra money you're saving. I'd rather get stuff payed off faster as it helps motivate me to get the rest paid off. I just paid off my last cc last week. I'll have my auto loan paid off in 2 months. Then onto my 401k loan. And lastly my student loan. One thing these videos need to address more of is to stop getting into debt. Dump the CCs. Only pay cash for cars. No more financing even if that means getting cheaper cars. Save ahead of time for college. Go to a cheaper school if need be. And get your emergency fund up to 3-6 months expensive. That's very easy to do when you have little to no debt.
Awesome video! (again). I used the painful snowball method, dumping every penny toward debt and paid it off (rhymes with Crave Damsey method). But the method described above is more strategic and compatible with life. Love it.
Same here!
Really appreciate your videos, I don’t feel like such a failure with your guidance helping me along! ❤ it actually gives me hope!
🥰🥺 So kind of you!! You can do this!! You are SO not a failure, I can't even tell you how many of us have fallen into debt and been trying to find our way out! You are not alone!
🌻 Hannah
I think I want to try and do a combo of both. Your videos makes me enthusiast about becoming debt free.
YAY! Go for it! Honestly, the best way to pay off debt is whatever strategy works for YOU. Sometimes the snowball is all we can swing; other times the avalanche fits more with our passion to get rid of that debt at the cheapest cost! The point is that we're debt-free in the end, and (after being in debt) that's one of the BEST feelings in the world.
🌻Hannah
Would love to see Hannah interview people on the street about budgeting - would be great to see what people think about debt. What the best methods are, and which method most people use.
Dude, that sounds FUN. I would love to do that too!
🌻Hannah
I've been using YNAB for 7 months, now. Cash flow is brutally tight for me, and I've recently needed to take out a $25,000 loan for home repairs. My strategy right now is to pay the minimum payments on my debts, and save what I can into a hybrid category to be used for emergencies or paying off debts. That has kept that money available for any intermittent expenses I haven't had enough time to build savings for. I only put it towards my credit card this month, when I had enough to pay it off altogether. Not having to make that payment every month will make it easier to afford my true expenses.
Best to apply the extra payments directly to principal and not to monthly payments to get total
cost of the loan down faster.
Graphics for the two methods were ‘on point’ ✅
Two years of HIFH 😳- where does the time go? More, more, more 😂 always. 👍🏻
Thanks Annette!! Those graphics were designed by my super talented co-worker Tristan! In fact, all the graphics that you see in the Heard it From Hannah videos were designed by him!!
And YES, two years and more and more to come!! 🥳
🌻Hannah
I found I did a hybrid method. I payed off a few of the smaller debts that could be paid off quickly so I could free up up money (and gain momentum) and then focused on the rest by interest rate.
Dude, YES. The answer to "what's the best method for paying off debt?" is whatever works best for YOU. Sometimes different methods make more or less sense at different times. I love that you found your own way of doing it and rolled with it! That's what YNAB's all about, right?!
🌻Hannah
While I was tempted to use the Avalanche method, I only have 2 debts by the way, they are both fairly close in interest rates, my credit card debt is over twice as expensive. However, while it sounded like a good idea to put my focus into it and also putting down an extra $1,000 to help bring it down, I spent my time setting up an Excel sheet, putting the $1,000 into the credit card debt, or my other debt and realized that not only is it smarter to use the Snowball method in this situation. While both have comparable payoff dates, I end up paying less interest rates in the long run by using the snowball method and paying the lower debt amount first. But I do believe if I had multiple debts I would use the avalanche method as while the snowball method looks nicer and makes you feel better I'd much rather payoff the debt with the most interest rate every time.
That is cool to hear. I just finished my 2nd year and starting my 3rd year with YNAB. It was one of your videos that made me sign up for the 34-day trial with YNAB again in February 2020. I had tried the free trial in 2019 and I could not get it and I did not like the program. I watched your video (How to Create a Budget Template) a year later and it just clicked. I signed up again and I never looked back. Thank you for all of your knowledge with YNAB. If it wasn't for you, I would not be using it right now.
😭 Well, don't make me cry, Jennifer!! That's AMAZING. Sometimes it *does* just take a while for a whole new system or whole new way of thinking about money to click. I totally get it. I had the same story-tried YNAB off and on for two years before my mind finally adapted to the YNAB way and now I'm more financially stable than I ever would've dreamed I would be at this age! Thanks for sharing, that's an incredible testimony!!
🌻Hannah
@@YNABofficial It's funny because your video popped up on my recommended page and I was thinking "Why am I getting YNAB videos recommended to me? I don't even use it." But I am very glad that I clicked on your video that day. Thank you so much.
Love love LOVE that!! Way to go, Jen!!
🌻 Hannah
We did the avalanche to pay off several debt. Beforehand, (1) we took out a personal loan to pay off all of our credit cards combined, then paid the loan off- loan was 12% fixed rate vs credit cards ranging from 12-24% variable rates 2) we refi car loan, student loans and mortgage for lower interest rates. With all the money we saved towards lower interests, it allowed us to make additional payments towards our highest interest rate debt for pay off.
Ahh! I also did a "transfer balance" situation when I paid off my consumer debt. I got another credit card that had 0% interest for 18 months and used it to pay off my other cards with that abysmal 24% interest rate! 🥴 Way to go on totally crushing the game!!
🌻Hannah
Holy Hannah!! I was under the impression the snowball was the holy grail for YNAB. I never even considered the avalanche method. Off to the budget I go!! Make some notes and rethink the strategy! Thank you Hannah!! Much appreciated. Thank you YNAB for giving me control over what was controlling me.
This method is totally better because you pay less interest in the end. You can do it!
We do think really highly of the snowball method because it frees up *more* money *faster* than the avalanche method would. So many method want you to throw every penny and ounce of energy you can at your debt, but most of us that are in debt actually just need a little more cash flow to prevent us from going into MORE debt-in this case, the snowball method is the kindest and most empowering! BUT, the avalanche can sure save you some big money in the long run!! It's all up to preference in the end!
🌻Hannah
I did the "anger and anxiety" method. Credit card debt makes me angry. Not owning my car outright makes me anxious. So I threw everything I had at the credit card debt and then redirected to the car loan after that. Now all that's left is student loan debt. What I do now is pay all my bills and then do some math with the leftover money. Half goes to the student loan debt. One-quarter goes to the savings builder and the last quarter goes into the daily living budget. That helps me pad up my entertainment budget and buy stuff I want without going into debt.
WOW!! You are CRUSHING it!! And man oh man, when you get those student loans paid off it's gonna feel like you got a double raise!! WOWZA! Way to go, friend!
🌻 Hannah
I think Hannah is incredibly charming. I enjoy these videos so much - and I find them so helpful Thanks!
Ahh, thank you Shelli!! I enjoy making them!!
🌻 Hannah
Hannah ...is it possible to make videos with no background music so people like myself , with sensory issues, can watch them?
Hannah is the best!
Thanks friend!! Back atcha!
🌻 Hannah
I am using the Snowball Method to pay off my credit card debt, which means that I will only be able to pay off the minimum for the rest of my cards. How do I work with this on YNAB? I am confused because minimum payments include both interest payment and payment on debt. How do I account for the payment on debt principal that is included in a minimum payment on YNAB? It’s confusing cause YNAB doesn’t have a minimum payment feature and also YNAB said to include an interest category but what about the payment
The concepts from this video could have saved us a decade ago!! Leaned the hard way! Thanks for the concise video!!
When you say minimum payments is that the minimum payment after interest?
Hey there! I love this app and thus budget has literally saved my finances, but I have a question. While you’re paying off the credit card debt (that would normally take 12 years to pay off but you’re adding $80 to the payment you make) wouldn’t you already meet the 4ish year mark for the car loan by the time you’re done paying the credit card debt off? Maybe my math is wrong, but it feels like the avalanche method only works if the interest rates correlate with how long it would take to pay off the debt using minimum payment as well? Or am I totally wrong?
I had similar thoughts. It somehow should correlate with the loan interest % and total amount. Not only on interest rate %
Technically the avalanche method is based on interest rate alone. A less extreme example than the $19K 24% credit debt might have made more sense. Maybe one that could be paid off in two years would better show how to free up more money to put towards car loan and saving for true expenses.
It stills works. What the method says, is where you should put the amount of money, that exceeds the minimum payment, that could go towards loans. If a loan have a short payment period it will likely be payed of using only the minimum payments before another larger loan.
Say for example you bought a washing machine at a 0% interest rate payment plan of 6 months. And that you also have a car-loan, at 5% interest, that would take 6 years to pay of on minimum payments. Then you would pay minimum payments on the waching machine and put whatever extra you have after budgeting towards the car loan. Let's say the extra payments are large enough to pay of the car in 2 years. Then you would have payed of the washing machine 18 months earlier, by only paying minimum payments.
To summarize, the order of the loans being payed of might not be the same order that you priorities putting extra money towards it.
How about negotiating the credit card interest down first? If we're looking for the cheapest way...
Never thought of that!! That's a bold move and a GREAT idea!
🌻Hannah
Hello, Hannah.
Hi, I have a balance transfer card ending in a couple months, 5k for transfer and 2400 for purchases.
Then, a card for 3500, on for 2500 and one for 600.
All high interest rates.
Balance card is 150 per month, next is 105, next is 85 and the other only 30.
My real goal is to get rid of monthly payments ASAP.
I can’t decide to focus on one of the 3500 or 2500 cards, or start hitting the purchases portion of that balance transfer card….
Hitting the balance card it’s still gonna be a long time befor I can full rid that payment,,but one of the others I can pry do fairly fast.
However 23.0 interest will start accruing on the transfer card once the zero percent ends in a couple months.
Any thoughts
If they're all about the same interest rate, then start with the lowest balance first as that will free up money quicker. This might also help motivate you as you see your debt disappear.
The best way to pay off debt is individual to each person. Do what works for you while also not getting into more debt.
I agree with the $200 car repair fund, but I would wait on the vacay until all debt is paid. Why prolong debt?
To each their own! All about your personal priorities! Do whatever gives you the most joy and peace!
🌻 Hannah
I have enough savings to pay off my credit union car loan. Should I do so? I won’t have much savings left afterwards, though I can save the interest.
Hey Sean! First off, DANG-that is SUCH a good feeling to know you're capable of kicking that loan right now if you wanted. Kudos kudos kudos.
My biggest question for you would be: if any kind of emergency or unexpected expense came up in the next few weeks, would you still be able to handle ALL your typical monthly expenses AND an emergency or a few unexpected expenses. If not (or it's cutting it uncomfortably close), I'd just keep sticking to your monthly car loan payments, or possibly even bump up how much you're putting toward the principal each month!
If paying off your car debt ahead of schedule puts you at risk of accumulating a whole new debt if some unexpected came up, that wouldn't seem worth it to me. I would rather make sure my car repair category, home repair category, emergency category, etc. are super duper padded and keep paying the loan off at it's normal pace (or bulking up that payment to the principal) until it's gone. The main difference between paying off that car loan early and paying it off according to schedule is just the interest that you owe in between-if you're comfortable with paying the interest, then feel free to keep paying at the normal pace while bulking up the rest of your budget! That'll set you up so, so well for the future and whatever else may come your way.
That's just my two cents, though! Ultimately, it's all up to you!! You got this!
🌻 Hannah
@@YNABofficial Hello Hannah. Great to hear from you in person.
Thank you for taking the time to answer my question in detail. That's a great point about having emergency funds and one which had not occurred to me.
I had to make a new start at the beginning of this month and leave my eight-year-old budget since I had lost control of it somewhat! While I have emergency funds built into my new slimline budget, they wouldn't be enough to cover a big emergency.
I'm happy to continue paying back the loan and will probably increase my monthly repayment.
Thank you again for taking the time to give me such a helpful answer. I love your videos.
Oh, you're so welcome!! Wow, the thought of doing a fresh start after using the same budget for 8 years 😳 Hard to have to start the data all over, but it's also SO refreshing and kind of therapeutic to start a new budget. Happy for you!!
🌻 Hannah
What about something that has only 0% interest for a short time? But has higher interest after the 0% is over
Shouldn't you put the extra money towards the principal of the loans or credit cards? That way less interest is being charged?
Unfortunately your app reviews haven't been very well lately. $100 for the year, is quite steep when you're showing this much debt. Wouldn't it be easier to just charge users a monthly fee, like you explain here in budgeting? Not everyone may have that $100 up front? Do you take payments?
Rearrange the plan whenever you need to to have it make the most sense! If the two year grace period for the medical loan ends and you still have a huge balance left on it, and now it's suddenly your highest interest rate, I would definitely reevaluate my payoff plan to prioritize it above my other lower interest debts!
🌻 Hannah
Excellent explanation as to why the Avalanche method is superior to the snowball method
I have 3 smaller 0 interest debts and big 1 at 17%. Avalanche seems perfect. The smaller debts will likely pay off while I'm still going after the biggest one. Do I still pause and reevaluate?
Oh, if you have interest-free debts I would *absolutely* prioritize the big debt with the 17% interest rate! Interest free debts cause you no harm to pay off at their proposed rate because you won't gain any interest charges on them. But 17% is a biiiiiig interest rate that will eat up a lot of extra cash first! I would absolutely pay the minimums on all of your 0% interest loans and focus in more heavily on your 17% loan!
🌻 Hannah
@@YNABofficial but even as I focus on that debt the smaller ones will get paid off and I won't have those monthly payments. Do you suggest I allocate as needed somewhere else in the budget?
Ohhhh, I see. Totally up to you!! If you feel like your true expenses and savings categories are pretty well padded (like car repair, home improvement, maybe an emergency fund) you could absolutely take the money you *were* putting toward your smaller debts and allocate them to the bigger debt in order to pay it off faster. BUT if you feel like we're budget is a little thin or frail feeling (you don't have as much financial padding for emergencies and unexpected events as you would like) then it might be smart to put that money toward building up some of your true expenses/savings categories a little bit more. Once you feel secure in your budget and like you could handle an emergency or unexpected expense when it comes your way, you can throw that extra money toward your big debt!
The big thing I always try to remember is we want to *prevent* ourselves from the need of having to take out anymore *new* debt while paying down our current debt. If putting tons of extra money toward your big debt after your smaller debts are paid off puts you at risk of needing to borrow more money if an unexpected expense comes, that's not worth it. If we can pad our budget a little bit with money to help us combat those unexpected expenses, *then* we can start to put more money toward that bigger debt because we aren't as much at risk of needing to take out more debt.
I hope this helps! That's just how my mind works, but YOU know your situation and circumstances best. Do what feels right to you! And if you find after a while you don't like the way you're doing it, switch gears and try going the other way! That's the beauty of it. Go with your gut!
🌻 Hannah
In the app the debt paid does not reduce, I have to do the editing 🙃
But how do you do this with regards to a savings account?
24% interest on the credit card.... yikes! 😬
Right?! It's real. When I got my first credit card, I didn't keep track of when the first 12 months of 0% interest ended, and iiiiiii was met with a verrrrry unpleasant surprise. At 24% interest. 😬 0/10 would recommend.
🌻 Hannah
If you could afford an emergency fund, or have expenses like vets bills, car repairs etc., covered, then you would't need to take out loans in the first place !!
Sometimes I wonder how the people are doing. How is Jenny doing?
Lol after 12 years they smaller debts would be gone, even at minimum payments.
Personally, I feel this is the only method to use as it saves more! So glad I no longer have to worry about it, now that YNAB helped me pay all of my debts!!
YEAHHHH TANYAAAAA!! Way to go. Freedom from debt is THE 👏🏽 BEST! 👏🏽
🌻Hannah