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He recommends you save up $1,000 + the balance on the next debt and then pay it off, that way if you have any emergencies or a job loss that really add up you're set.
Focus on RISK.
Pay off the RISKIEST debt first.
I never hear this on the mountains of blogs and PF arenas. I see the focus on balance, or interest rate, or emotions or something else seemingly obscure.
You could also rank debts on monthly payment size, alphabetical order, due dates, age of debt, literally countless ways that all seem to work in some way or another.
But risk is the best way. Mathematics works most of the time, but there are always caveats.
You say use the optimum mathematical approach "except" if there is a nagging family member, or "except" this. You also assume that the payee will have the ability to continue with payments in the future based on current circumstances.
That does not accout for risk. The riskiest debt? Likely a debt that if not paid would cause greater harm than simply paying more interest. Say the IRS. Or a Tax lein on property. Or a loan to someone who could harm you in some way, ie spread rumors and harm your reputation, make life difficult, get you fired, etc. OR maybe a debt that stresses you out, keep you up at night, causes anxiety and rifts between your spouse. Causes you to not focus on you kids, because you are always worried.
Life is lived not on paper or in theory, but in reality. Risk takes into accout that reality every time. There are no caveats. If you have an IRS debt that if not paid can result in you losing property, or wage garnishment, or even loss of freedom, then math really doesn't come into play.
Likewise, if you have a debt with an upcoming adjustment, or even the possibility of an interest rate adjustment, that risk must be considered.
I would pay off the loans that pose the most risk in declining order. If they all have an equal amount of litle risk, then I would focus on the method that will most likely produce results. If that method is mathematical, fine. If it is emotional, fine. But it takes some time, some thinking, and some introspection. Paying off debt requires understanding WHY you are doing it. Considering risk forces that WHY upfront, and makes it crystal clear. It exposes the issues, the problems, and the solution automatically
But most people don't have debts with equal risk. Some loans are fixed. Some are variable or adjustable. Some debts are on appreciating assets, some on depreciating. Some on no assets. Some can be cleared in bankruptcy, some can't. Some prevent you from selling your home or refinancing. Some can get you arrested.
So list your debts. Then take risk into account. Is the rate fixed. Can it adjust up or down. What is the likelyhood of that happening. Who is the creditor. Can that creditor come after other assets if you don't pay. Can they inform your employer, garnish your wages, etc. Do they visit you on holidays. Are you related. Do you do other business with them and have other assets they could tap into.
Everyone has intentions. Intentions don't matter, actions do.
I agree completely that people can save money using the avalanche rather than the snowball approach.
Main problem: We're talking about people who spent themselves into tens of thousands of dollars of debt by using the instant gratification philosophy-much like the toddler's "I want it now." Not exactly a sound financial mindset.
The genius of the snowball method is that it takes Americans' "I want it now" philosophy and contorts it into "I want progress now." As with a diet and exercise program, most people who don't see significant results in the short-term will abandon the plan altogether, so the baby steps work by eliminating one chunk of debt every few months. But you still have to be disciplined to get out of debt and stay out of debt.
The genius of the avalanche method is that the debtor will most likely eliminate all debt more quickly, and save considerable money-as you said. But you still have to be disciplined to get out of debt and stay out of debt.
The avalanche method works for the financially savvy, the snowball works for the other 99% of Americans who aren't very savvy and need psychological boosts. Either way, human nature dictates that a great many of the users of either method will end up in debt again. Getting advice from a guru or a blogger is great, but it isn't easy to stay out of debt-especially in a consumer-driven economy (interesting that the name of your blog precisely hints to the bad spending habits of our nation's citizenry-you no doubt did that on purpose.) And if history has shown us anything, it is that people will choose the easy route over the hard the vast majority of the time. Put another way: whichever method of debt elimination is chosen, most people don't know what to do after the goal is reached; and furthermore they have no significant psychological boosts to keep them out of debt. Therefore, the old spending habits return (the same spending habits that put said people into tens of thousands of dollars of debt) and consumers get their psychological needs met through that spending.
Take a look at the easiest (and stupidest) route to getting out of debt-the lottery:
"88% of lottery winners still participate in the lottery every week. (creatures of bad habits)
2% have stopped playing altogether. (the very few actually stumble upon the fact that playing the lottery probably wasn't a good idea in the first place and don't want to throw more money away)"
**Source: Nettime (parentheses are my observations)
http://amsterdam.nettime.org/Lists-Archives/net...
Moral: we are a society of consumption. The majority of the society will continue to consume until their financial resources have run dry. Then, they'll turn to credit to keep consuming. Yes, I'm being pessimistic, but also realistic.
U.S. Data (Bureau of Economic Analysis)
2009 Q1 Disposable Personal Income = $10.78 trillion (DPI is Personal Income less tax)
2009 Q1 Personal outlays (i.e. consumption, interest,etc.) = $10.31 trillion (95.6% of DPI)
2009 Q1 Personal saving = $475.5 billion (4.4% of DPI)
With many saving 15% or more (and those doing so typically earning far more than the average personal income, a great many Americans are saving less than 4.4% and some even spending more than 100% of their DPI.) Sad, but true. Neither the debt avalanche nor the debt snowball nor the other listed debt reduction strategies can change this-it has to be a change in the societal mindset from consumerism to: eating first, then saving, then spending (you know-like our grandparents' used to do.) Change usually only comes when the pain of staying the same exceeds the pain of changing. Politicians are always making decisions (at their constituents' behest) that ease the pain of staying the same, thus keeping society from reaching that tipping point to cause change, thus further creating the two class society of those who have money and those who have debt.
I probably got pretty far off the topic of your post, but I'd say I'm well under the umbrella of commenting on consumerism.
We are all familiar with the concept of 'good debt' and 'bad debt', but most don't realize that this is only a way of avoiding getting INTO (bad) debt ... once we have acquired the debt, then we need to start thinking of debt simply as 'cheap debt' or 'expensive debt'. The Debt Avalanche is clearly ideally suited to attacking the 'expensive debt' first.
However, there is another part to this: our ultimate financial goal is usually not to become 'debt free' (although, that may be a tactic that some would choose ... not me!), rather to achieve financial independence, or wealth, or [insert your life-supporting goal, here], and often a part of the strategy will be to acquire SOME debt in order to get there while you are still young enough to enjoy life e.g. you might decide to take out a mortgage on an investment property, or a margin loan on stocks, or a small business start-up loan, etc.
Clearly, it would make NO sense to delay investing just so that you can pay off relatively cheap debt (e.g. student loan, mortgage, etc.) i.e. just to take out more expensive debt later (e.g. the small business loan) ... instead, leave the cheaper loan in place and "pay off' the more expensive loan by not taking it out in the first place!
Once you think about debt and investment as 'cheap' v 'expensive', it becomes easier to apply the principles of the Debt Avalanche to both debts AND investments :)
http://7million7years.com/2008/12/09/the-cash-c...
Here is another way - this would only work if you have access to good 0% offers -- it's not a way I invented, I read it from a post of a blogger who has done arbitrage on a grand scale. But I think had I found myself in debt for whatever reason, this would be the way I'd try to do it:
1. Get a 0% credit card and transfer all high interest debt there. There could be a 3% transfer fee, but it is likely to be a whole lot less than what you are paying in interest. Open a higher yield savings account.
2. Pay the minimum on 0% credit card (preferably via auto-pay so that you are never late) and make your additional payments to this savings account instead. Don't touch this savings account for any reason, think about this money as belonging to someone else.
3. A month or so before 0% period expires (or if you get a bill that shows that for some reason your interest went up), take all the money from this saving account and send a check to this card. If there is still balance, find another 0% card and repeat.
This will only work if you have access to 0% cards and if you are disciplined enough not to touch this money.
As to the rest - as someone with a math background I cringe at the idea of wasting any money on interest which is what paying off the card with the lowest balance is.
I would also like to second 7million7years in that keeping fixed low interest debt around instead of repaying could be a valid investment strategy. One thing to keep in mind always is the possibility of future inflation and/or higher interest rates - a reasonable expectation nowadays. Even if all the government's printing of money doesn't cause high inflation, the government is bound to raise rates at some point. Long term rates are likely to go up regardless of government action as the appetite for the US government bonds vanes. If your debt is at 4.5% now, it may seem like higher than you can get on a normal CD. But what about 5 years from now? During the early 80s where you could get double digit returns on normal bank CDs people who 30-year fixed mortgages at 9% were feeling very lucky... Long term fixed low interest debt is as much a hedge against inflation as buying commodities or TIPs. In fact I have a couple of multi-millionaire friends who took a mortgage on their vacation home when they could've paid for it in cash.
Brilliant! :)