Ahh….it’s that time of year – The Holidays. If you’re like many people, the Holidays can be stressful. Traveling to see family and friends, finding the perfect gifts for loved ones and Christmas shopping. If you’re smart, you’ve budgeted for Christmas well ahead of time and have money set aside to buy all your Christmas gifts. If not, that’s where it gets dangerous if you aren’t careful.
In the day and age of easy, online shopping, coupled with the Pre Black Friday deals, the Black Fridays Deals and then Cyber Monday – its easy to knock out all your holiday shopping at once while getting caught up in the deals and suddenly maxing out your credit card. I kinda went on a shopping spree myself. After 2 years of COVID lockdown, things are slowly starting to feel festive again and it was easy to start getting carried away with Christmas shopping. I bought one thing on a Black Friday sale, then searched for an online coupon to drop it even further. Then, calculating the money I saved, I figured I would buy other gifts and found more online coupons to drop the price even more. Before you knew it, I figured, “Fuck it. I’ve saved money and bought the gifts I needed to buy – I owe myself something too. Maybe that new Modern Warfare 2 videogame. Hell, I could also use a new set of AirPods since my other ones rarely charge.” Agh. It happens to all of us.
Sometimes we get so caught up in the Holiday spirit, we throw it on a credit card and figure we’ll pay it back throughout the year. After all, its the Holidays right? Then that credit card continues to grow month after month until you finally pay it off a year later when Christmas comes around the next year and the cycle starts all over again.
So, how do you manage debt for the Holidays. After all, we all know when the Holidays are coming. Its not a secret. Maybe you’re one of these hardcore mom’s who finish their Holiday shopping on December 26th in preparation for next year. You laugh – but there may be some truth to that kind of mindset. Again, it’s not like Christmas just appears out of nowhere. If you really wanted to, you could setup a sinking fund for next year and allocate $50 or $100 bucks each month to prepare for the Holidays. The key is to stay within the budget when the times comes. That’s one way of doing it.
But what about those who fell in credit card debt last year and are starting to add to it again? Maybe you’re in credit card debt, but have already set the standard for Christmas gifts and keep buying more. In that case, I would say to STOP. Your loved ones will still love you regardless of what is under the Christmas tree.
but if you’re in credit card debt, how can you start paying them down? Meet the Debt Snowball and the Debt Avalanche. So festive for this time of year. Anyway, The Debt Snowball and the Debt Avalanche are two ways of paying down debt.
Let’s start with the Debt Snowball. Through this method, you write out all your debts in order from biggest to smallest. You pay the minimum on all your debts and focus your efforts on paying the smallest debt first using a zero based budget. What that means is – any leftover money you have at the end of the month goes directly to that smallest debt leaving you with zero cash at the end of the month. You repeat this process until the lowest debt is paid and then use the money allocated for that debt to tackle the second smallest debt using the zero based budget as well. Once the second one is paid, you then snowball the money used from the first debt AND the second debt to pay off the next largest debt while using that zero based budget and so on and so forth. All the money you use to ay these debts keeps snowballing until you’re debt free. Awesome right? All it takes is discipline.
Now let’s look at the Debt Avalanche. Through this method, you again list out all your debts, but instead of listing them from largest to smallest, you list them in order of largest to smallest interest rate. Regardless of the size of the debt, your priority goes tot the debt with the highest interest rate first. Just like the Debt Snowball, you pay the minimum on each of your debts, while focusing all your effort and extra money toward the debt with the highest interest rate first. Again, using the zero based budget, all extra money goes to that first debt until it’s gone. Repeat again for the next debt with the second highest interest rate using the money from the first debt, the minimum amount you were paying toward it initially and any extra money at the end of the month. Rinse and repeat for the third and then the fourth until you’re debt free.
Which one is better? Well, that’s kinda a matter of preference. For people just starting this process, the Debt Snowball might be better initially. There’s something psychological about building the confidence to tackle that first debt. Once that’s done, not only do you have confidence, but you also build momentum and before you know it, you’re a freight train that can’t be stopped.
By the numbers, I believe the Debt Avalanche is more efficient. Depending on your debts, this can wipe it out quicker. Both take discipline and can open up your income to more cash flow and intentional spending.
Anyway, if that applies to you or you’ve done it in the past – tell us about it! We’d love to hear the trials and tribulations surrounding the discipline required to pay off your debt. Above all, it’s that experience that helps push others to do it themselves! Happy Holidays!