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Saying Goodbye to Debt: A Simple Method That Works

October 6, 2016

By Marcus Winbush, CFP® — CEO, True North Capital Alliance

Debt is commonplace at every level of our society. For many people, it starts early with loans for higher education and then that first credit card, which signifies entry into adulthood. It continues as they use credit to purchase automobiles, houses, vacations, home essentials, and their favorite toys. What usually starts out small and very manageable can mushroom into a heavy burden of revolving credit with no end in sight. After the 2008 financial crisis, many Americans paid household debt down aggressively. However, the Federal Reserve recently reported that household debt is on the rise again as I discussed in my October 3, 2016 post.

Using data from the Fed and the U.S. Census, researchers at ValuePenguin made some surprising observations about the debt levels in American households. As of May 2016, total revolving household debt in the U.S. was $929 billion, and the average debt for households carrying credit balances was $16,048. To make matters worse, many of these balances are for credit card debt with interest rates that can run as high as 24-26%.

It’s no wonder many people find it almost impossible to get out of the debt trap. But there is a way out. By applying a few simple steps, anyone can begin saying goodbye to debt.

Is the Payoff Worth the Effort?

Unless you are among the fortunate ones who pay their credit balances each month, you may want to consider using the debt payoff plan outlined in this post. Making minimum payments on credit card debt leads to a debt trap. Quentin Fottrell, News Editor for MarketWatch says that it takes 370 months—just over 30 years—to pay a $2,000 credit card balance at 18% annual rate if you make minimum payments. The amount of money you save in interest alone is worth the effort. So with that as motivation, let’s look at a simple, but highly effective debt payoff tool.

Begin with a Commitment

Set a goal to pay off all debt except your mortgage for now. At first, you may think this is an impossible goal. But personal finance advisers such as Dave Ramsey and others have helped many people get out of debt using the Snowball Debt method. It is simple, but effective.

The first step is to stop adding new debt. Commit to use cash, checks, or a debit card for all your purchases. If you don’t have the cash, you don’t make the purchase. This commitment is crucial to escape the revolving debt trap.

Know the Ins and Outs of Your Money

List all your monthly income and all your monthly expenses to determine whether you are spending more than you earn. Include savings and an allotment to yourself for incidentals like eating out or entertainment. Having money reserved for personal spending helps you avoid impulses that can sabotage your progress. Assuming that your income exceeds your expenses, you are now ready to tackle the debt.

Get Ready to Snowball Your Debt

The Debt Snowball gets its name from the image of starting with a small snowball and rolling it in the snow until it gets bigger and gathers momentum as you roll it downhill. To snowball your debt, follow these simple steps:

  1. List all your debt except mortgage payments for now in the order of the lowest balance to the highest. Include the monthly minimum payment and interest rate for each one. See example below:

    DebtBalanceMthly MinimumAnnual Rate
    Credit Card 1$300$2518%
    Credit Card 2$600$3026%
    Credit Card 3$1,500$5020%
    Car Loan$5,000$1753%
    Student Loan$15,000$1504%
  2. Decide how much extra money you can apply toward paying off debt each month. The more you can add, the sooner you will achieve your goal. Getting free of debt is worth making a big sacrifice because the payoff will be life-changing.
  3. Start by adding the extra dollars you allocated to the minimum payment for the smallest debt. Continue paying the minimum on all other accounts.
    • In the example above, I would add an extra $125 to the $25 minimum for Credit Card 1 to make a payment of $150 per month until the balance is paid. Credit Card 1 would be paid off in two months.
    • By the third month, I would have $150 added to the $30 minimum for Credit Card 2 for a total payment of $180. Credit Card 2 would be paid off in three months.
    • At this point, I would have a total of $230 to apply toward Credit Card 3 each month, so that debt will be paid in-full in just over 5 months. In 10 months, I will have eliminated all three credit cards ($2,400 of debt).
    • Then I would apply my snowball ($405) against the car loan, and pay the balance in eight months.
    • By the time I aim my snowball at my student loan in this example, I would have $555 per month to pay off my student loan in less than two years.

That’s the power of the snowball: You can literally see yourself making progress and gaining ground against your debt. And success begets success—with the debt snowball, it easier to stick to your commitment.

As you can see, it is relatively easy to calculate the snowball manually. However, if you prefer to use a calculator to help you, several free spreadsheets or calculators are available online.

As an alternative, you could target your debt in the order of highest to lowest interest rates (known as the “avalanche method”). Depending on the mix of debt you have, this method might take longer for you to generate the momentum that comes with seeing debt paid off more quickly. The Debt Snowball gives you the emotional satisfaction of early momentum as the snowball rolls downhill through your remaining debt.

Cash is King

Once you pay all your revolving/credit card debt, you create countless financial options for yourself. You may choose to pay off your mortgage and become entirely debt-free. Or you may focus on increasing your savings and investment portfolio. The point is the options are yours: You are no longer limited by the debt trap.

If you have questions about debt payoff strategies or any of the information in this post, feel free to contact me.


True North Capital Alliance is registered as an investment advisor with the states of Minnesota and Texas. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment advisor does not constitute an endorsement of the firm by securities regulators nor does it indicate that the advisor has attained a particular level of skill or ability.

Past performance is not a guarantee of future results.

All expressions of opinion are subject to change. This content is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

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