If you’re like more than 80% of Americans out there, you have some form of debt. The fact that you’re reading this tells me you want to either reduce or completely eliminate the debt you have. In this blog, I’ll tell you the two best strategies for how to pay off debt. Oh, and I won’t leave it with a political stance straddling the fence position. I’ll tell you what The Doss Experiment thinks is the best of the two.
The two methods are:
- The Debt Snowball
- The Debt Avalanche
Both methods require discipline! We, at The Doss Experiment believe the debt Snowball is the best way to eliminate debt!!! Read on to find out why. However, before I get into the methods, let’s go back and talk about what debt is and how it affects you.
Definition of Debt
- something, typically money, that is owed or due
- the state of owing money
Learn More About Debt Statistics
The Doss Experiment doesn’t think all debt is bad debt, but we firmly believe that life without debt is 1000X easier. You have A LOT more choices when you don’t have your money feeding debt.
How Does Debt Limit My Choices?
When you go to buy a house, one of the major things lenders look at is your Debt To Income (DTI) ratio. You’re probably thinking, what the heck does that mean? DTI is the relationship between how much you make (income) and how much you owe (debt).
Example:
If a person has an income of $3400 per month, but they have a mortgage of $1500 per month, a car note for $400 per month, a student loan of $450 per month, and 3 credit cards with a minimum payment total of $250 per month. The total debt would equal $2500.
To figure out the DTI, you would take the debt total of $2500 and divide that by the total income of $3500.
Debt to Income Ratio (DTI) Formula
Debt(2600) ÷ Income(3500) = DTI(74.3%)
Most lenders want a DTI of 40% or less. If you shop around, you can find some that will go higher, but keeping it below this number will greatly improve your chances of being approved for a loan; car note, personal loan for medical expenses, or a home mortgage.
You may be thinking, I don’t want to borrow more money…why do I need to pay off my debts sooner?
- You’ll Spend Less Money for the same thing.
- You’ll have more choices.
- You’ll have more security.
You’ll Spend Less
Banks make money by charging interest. Interest is the number 1 source of revenue for banks!!!
Interest definition:
- money that is paid for the use of another person’s money
If you purchase a car for $20K in cash, you pay $20K. However, if you buy a car for $20K and borrow the money at 4% interest for 5 years, which is typical…you’d pay an additional $2100 in interest.
Let’s say you don’t have good credit and you have to pay 10% interest…then you’d pay an additional $5500 in interest.
Just for kicks, let’s say you have bad credit and have to pay 20% interest…you’d pay an additional $11,800!!!
In each of these scenarios, you are getting the same car, but the amount you pay because of debt can be very different.
A closer look at how interest works…
Let’s talk about the 10% interest scenario, where you pay $5500 in interest. If you accelerate your time to pay this debt by adding an additional $100 per month to your payment, you would pay this debt 13 months early and save $1300 in interest. Getting out of debt faster enables you to spend less money.
More Choices
You know…The Doss Experiment talks a lot about money. However, we don’t feel like money is everything…BUT…It is right up there with air though!!! The fact is, the more money you have, the more choices you’ll have. Now, if you’re in a position where you can’t make more money, you can always eliminate debt. (If you’re living in America in 2022, you can always make more money.) This article isn’t about that though. We’re talking about debt.
Personal Story While In Debt
The Doss Experiment has personally experienced the lack of choices available with debt and the awesomeness of having none. When we had a car note and student loans to pay off, going away for a weekend on a single “entry-level” income was next to impossible. A “vacation” involved staying at a family member’s house for the weekend and maybe having pizza.
Personal Story With No Debt
Our last vacation to New York was 5 days. Our Family stayed at hotels, all but the last night, where we stayed with some good friends. We saw the Statue of Liberty, went shopping in Manhattan, and went to an amusement park. Still had pizza…but seriously, WHO goes to NY and doesn’t eat pizza?!? Next year we’re going to Hawaii.
If we were still carrying a car note, student loans & credit card debt, 5 days in NY wouldn’t be an available choice….Hawaii wouldn’t be an option. Hotels, amusement parks…none of these would be good choices. I guess, in reality, we could have taken on more credit card debt and done all of these things. You’re reading my blog though, which tells me you’re interested in better choices.
More Security
I think it should be pretty obvious how you’ll have more security, but I’ll tell you about why I feel more secure. Debt is a liability. It dramatically increases your expenses!!! Let’s say you are carrying debt. You have a car note and loans and credit cards. All of these things carry monthly costs.
- Car Note $400/mo
- Loan $400/mo
- Credit Cards $300/mo
How This Effect You
With Debt
You’re now looking at $1100/month to feed your debt. That means every month you need to make an extra $1100 just to survive!!! If your normal monthly expenses are $2500/month. You need $3600 to live THE SAME LIFE!!! Nothing will be different. It’ll be the same. For most of us, it’s easy to find a job making $3600 a month. It could be tight, but it’s doable. Now imagine you lose that job…could be layoffs, bankruptcy, fired, accident, or divorce…whatever the reason, you now need a new job. You were just making enough, so you don’t have much in savings. If you can’t find a job making the same amount soon, you will start losing things…LIKE YOUR CAR…which you need to get to a job!!!
Without Debt
However, if you have no debt to feed, you’ll only need to make $2500 to live the same life. Most jobs will pay $2500/ month. Fast food…gas stations…it can be easily done. If you find a job that makes more, you can add to your savings and provide even more security.
Real-Life Situation
With Debt
Real-life situation…before becoming debt free, the clutch failed on my Saturn Ion…yes I drove a Saturn, and it was a stick shift. The repair was going to be about $800. I didn’t have the money saved to repair it, and because of the debts being paid off, I didn’t have the savings to repair it, either. Sadly, I bought another car and that Saturn never got fixed. I ended up selling it to someone for $300.
Without Debt
Recently, our Prius had an issue, and it needed a repair, that was more than the car would be worth to us. Being debt free for a few years, we had the time to build an emergency fund, because all the money that was feeding debt goes straight to savings. I wasn’t worried or phased. I knew the money was available to get buy another car in cash. I’ll write about this deeper in a future blog, but PLEASE don’t eliminate all your debt, just to find a new “thing” to spend the money on. That won’t give you more security or choices.
So now that you have a few reasons why it’s good to be debt free let’s talk about how to get there.
Ways to Get Rid of Debt
There are many strategies for how to pay off debt. We’re only going to talk about the two most popular: The Debt Snowball and the Debt Avalanche.
Debt Snowball
In the Debt Snowball Method, you pay off your smallest debt first and just keep attacking them until you get to the largest. Every time you get rid of a debt, you add the amount you were paying the smaller debt to the next debt.
Debt Example
Let me give you an example. Let’s say you have the following debts:
- Student Loan $57,000 @ 3%
- Car Loan $28000 @ 7%
- American Express $3000 @18%
- Shell Gas $175 @ 25%
- Best Buy $2000 @ 22%
- Macy’s $700 @ 27%
- Hospital Bill $1200 @ 0%
- Capital One $5000 @ 26%
- Motorcycle Loan $8000 @ 4%
- iPhone $650 @ 0%
Typical Debt In America
The above example is $105,725 in debt total. Making the minimum payments, they would probably remain in debt for the next 30-plus years….the reality is they would be in debt for the rest of their lives because debts like these come from bad habits. Unfortunately, those same bad habits would just create more debt as they were being paid off. I know we all know that person, or WE are that person.
With Debts Come Payments
Let’s suppose the minimum payments on the above debts are as follows. I put the length of time it would be to pay them off if there was 0% interest on everything and you only made the minimum payments. That’s a 10 year sentence to debt service at minimum. I’m not saying, but I’m just saying sex offenders get 10 years!!! You don’t deserve that. The sad truth is you can at least double most of the times listed down there because interest is, in most cases, unavoidable!
- Student Loan $495 (9.6 years)
- Car Loan $525 (4.4 years)
- American Express $125 (2 years)
- Shell Gas $25 ( 7 months)
- Best Buy $40 (4.1 years)
- Macy’s $35 (1.6 years)
- Hospital Bill $75 (1.3 years)
- Capital One $150 (2.7 years)
- Motorcycle Loan $250 (2.6 years)
- iPhone $50 (1.1 years)
That would make your debt service (the amount you pay to debts every month) $1770. That’s $1770 EXTRA…you need to make just to live your life. In most places, that is the equivalent of a rent or mortgage payment. In some places, that would be double your rent or mortgage.
Think about it…
I really need you to take a second and think about that. Your debt could be buying you your own house. You’re probably thinking, could I really be buying a house?
Let’s look at some real numbers!
If you were to buy a $300K house at 7% interest with a 4% down payment because of an FHA loan program. Your monthly payment would be $2180 if you include taxes and insurance. Wait, Sam!!! That’s more than $1770. You’re right, it is! However, if you look at the bills I listed above, you’ll notice rent/mortgage is not listed. The difference between $2180 and $1770 is $410. I don’t know anyone who is paying $410 or less for rent unless they live at home or have roommates. If you do somehow pay $410 for rent, the houses nearby are not $300K. They’re closer to $150K, or a mortgage payment of $1123 with the same scenario.
Debt Snowball in Action
Earlier I told you the debt snowball is a strategy where you pay the smallest bill first and roll the payment into the next bill until you pay off your debt. In the above example, if we arrange the debts from smallest to largest, we would start with the Shell Gas Card for $175 and work our way to the $57K car. There are 2 debts that ARE actually at 0% (hospital and phone). We will skip those and continue with the minimum payment because the money borrowed isn’t costing anything.
How to Pay Off Debts 1 & 2…
If we are serious about getting debt free, we are going to skip Starbucks, Dunkin, the happy hour drink after work….whatever we have to, to come up with the extra $150 to pay off the Shell card in the 1st month. Let’s be honest, that kind of debt doesn’t come without some bad spending habits. Now we have $25 more (the Shell Payment) to add to the $35 Macy’s payment for a total of $60, now going to Macy’s…and let’s be honest, you’re trying to get out of debt, so you created a real budget (We’ll go over that in a future post) and have found an extra $50 you were wasting every month to kill this debt faster. So you are actually putting $110 toward paying off Macy’s. That bill was $700, so 9 months later, you’re free of another bill!!!
Mini Praise!!! You’re on the way…
Woohoo, time to celebrate….but not with a shopping spree to add more debt. Maybe you can get that Starbucks you’ve deprived yourself of for the last 9 months, tomorrow….and tomorrow ONLY! You still have work to do! Let’s show you how to pay off that credit card debt.
Debt 3 Gone…
We’re now going to tackle that Best Buy Card….that 70 inch was totally worth it, though!!! We were paying $40, and now we’re going to add the $110 we were paying to that for a total of $150. A year later, Best Buy is gone! We’re rolling!!!
Debts 4 & 5 Gone…
If you remember there were 2 debts that were at 0% (iPhone & Hospital) It’s been almost 2 years and they are both, now, paid off, which gives us an extra $125 to add to the snowball.
How to Pay off Credit Card Debts 6 & 7…
It’s time to get rid of the American Express bill! $275 (sum of paid off payments) + $125 (amount we were already paying). We’re now throwing $400 at it. 5 months later and poof! One more debt down. Capitol One….time to get out of my wallet!!! $150 + $400, and now Capital One is getting $550 thrown at it every month! 8 months later They are gone, too!
Debt 8 Gone…
It’s been about 3 years, and we have eliminated 7 of the 11 original debts already!!! We’re about to pay off the motorcycle…and this is getting really easy. We were paying $250/mo already. Now we’re adding $550 and paying $800/mo. 3 months later…that’s gone too. Hopefully you can get a clear picture of how this is increasingly paying the debts faster.
How to Pay Off Debt 9…
Now let’s finish buying that car from the bank. We were already paying them $525. Add that $800, and now they are getting $1325. That’s $4K every 3 months. You’ve been paying this debt for 4 years of the 6 years you had on your loan. Now magically, 10 months later, a title for your car is arriving at your house! The bank no longer has it.
Almost there…Your sacrifice and discipline should be rewarded!!!
This calls for a special night out. Go get some lobster or steak, or whatever it is you LOVE!!! You’ve earned it!! Keep your head down…there’s still a little more work to do to a off your debts.
Four years into your…easily 20 plus year debt sentence, you have eliminated all but 1 of your debts. All you have to be debt-free is the dreaded student loan bill. You’re going to totally crush it though. You have a strategy and momentum. You can see the finish line, and it’s amazing!!!
Student Loans Suck!!!
You were sending them $495/mo, but now you can send them $1820/mo. That means every 5 months you are knocking that bill down by more than $9K. 1.5 years later you send them your last check!!!
Time to Pop a Bottle!!!
You are officially debt free!!! You’ve figured out how to pay off debt fast! Now, you just gave yourself an $1800/month raise or $21,600 per year!!! That raise is tax-free, by the way, because you have already paid the taxes on it!!! How long would it take you to get a $21K raise at your job??? What could you do right now if you had an EXTRA $1800 to use every month??? Would you move out of your parents’ house or ditch that roommate you hate, but can’t afford to live without? Would you get lessons for that thing you’ve always wanted to learn? Your options just got bigger. You now have more choices, and that’s what this is all about!
Now that you know how the debt snowball works…let’s talk about the debt avalanche.
Debt Avalanche
The debt avalanche method is where you attack the debt that has the largest interest rate first and work your way down to the smallest.
Debt Avalanche Example
The reason for this method is the debt with the highest interest rate is costing you the most amount of money.
Example: $30K borrowed at 2% for 10 years would cost you $3125 in interest, but $30K borrowed at 12% for 10 years would cost you $21695 in interest.
In the above example the $30K at 2% would end up costing $33125 in total, but $30K at 12% would cost $51695 in total. That’s a difference of $18570 for the same $30K.
Using the numbers from the Debt Snowball example above, the Avalanche Method would say to attack the Macy’s card first with its 28% interest rate. Then, eliminate the Capital One card at 26%. We would keep going until we get to the 3% student loan debt. Just like the debt snowball, you would be putting $1820/mo towards that bill when we got to the last one.
Let’s Wrap It Up
Don’t get too caught up in how you choose to pay off your debt. There’s no right or wrong strategy. Though The Doss Experiment prefers the snowball, my real-life journey was a combination of the two strategies. We just want you to get out from under the debt trap…prison. We want you to live your life with more choices and security.
Take Action!!!
Don’t wait until tomorrow!!! Start your journey today!!! I know it can seem overwhelming, especially if you have a lot of debt, but you CAN do this!!! Set your goal to be debt free today! We only fail when we quit.
“We all learned to walk one step at a time after MANY failures, but we all survived it because we didn’t quit!!!”
-Doss Experiment
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