Debt Snowball vs. Debt Avalanche: What’s The Difference?

January 3, 2021

Just about everyone has to deal with debt in one form or another. Whether it be student loans, credit cards, auto loans or mortgages. In the journey to financial independence debt is a hurdle that usually needs to be overcome before committing to early retirement. The debt snowball and the debt avalanche are two popular methods to tackle debt.

What is The Debt Snowball?

The debt snowball is a debt reduction strategy that begins by paying the account with the smallest balance first while making the minimum payment on larger balances. To do this, list all of your debts including balance owed and the minimum payments. Find your lowest balance debt and start putting any extra money towards that debt. When you knock off your first, smallest balance you then start paying off the next highest debt. You start to gain momentum as your smaller debts get paid off and those minimum payments are applied to your larger balances.

Let’s consider a scenario where one has student loans, credit card debt and an auto loan.

Student loans: $8,000 balance, $50 minimum payment. (6% interest)

Credit card debt: $10,000 balance, $75 minimum payment. (24% interest)

Auto loan: $15,000 balance, $250 minimum payment. (3% interest)

Let’s also assume that this person has an extra $300 per month allocated to pay down their debt. According to the debt snowball method, this person will pay $350 per month on their students loans because this is the lowest account balance. They will also pay the $75 and $250 minimum payments for their credit card and auto loan, respectively.

When their student loans are paid off, they will take the $350 that they were paying towards them and pay that towards their next highest balance, their credit card. They will now be paying $425 per month towards their credit card and the minimum payment of $250 for their auto loan.

When their credit card is paid off, they will take the $425 that they were paying towards it and pay that towards their next highest balance, their auto loan. They will now be paying $675 per month towards their auto loan.

As more loans are paid off, more momentum is gained reducing the time it will take to pay off the next loan.

What is The Debt Avalanche?

The debt avalanche is a debt reduction strategy that begins by paying your highest interest rate debt first, while making minimum payments on your other debts. To do this, list all of your debts including minimum payments and interest rate. Find your debt with the highest interest rate and start putting any extra money towards that debt. When you knock off your first, highest interest rate debt you then start paying off the next highest interest rate debt. Like with the Snowball method you start to gain momentum as your debts are paid off.

Let’s consider the same scenario as the snowball method with the student loans, credit card debt and auto loans.

Student loans: $50 minimum payment, 6% interest. ($8,000 balance)

Credit card debt: $75 minimum payment, 24% interest. ($10,000 balance)

Auto loan: $250 minimum payment, 3% interest. ($15,000 balance)

This person also has the same $300 per month extra to pay down debt. According to the debt avalanche method, this person will pay $375 per month towards their credit card because this is the account with the highest interest rate. They will also pay the $50 and $250 minimum payments toward their student loans and auto loan, respectively.

When their credit card is paid off, they will take the $375 that they were paying towards it and pay their next highest interest rate debt, their student loans. They will now be paying $425 per month towards their student loans and the minimum payment of $250 for their auto loan.

When their students loans are paid off, they will take the $425 that they were paying towards them and pay their next highest interest rate debt, their auto loan. They will now be paying $675 per month towards their auto loan.

What’s the difference?

While these two debt reduction methods are similar in concept they can vary greatly in results. You’ll notice that the debt snowball method focuses on balance remaining and minimum payments while the debt avalanche method focuses on minimum payments and interest rates. The minimum payment figure is less important than the total balance and interest figures, since these figures are what dictate which order debt will be paid.

For efficiency the debt avalanche wins. If your goal is to pay off your debt as quickly as possible and pay the least amount of interest then the debt avalanche is for you. That’s not to say that the debt snowball is worthless. Paying off debts is empowering and by paying small debts first you may get a morale boost that may have taken longer to achieve with the avalanche method. There is a certain intrinsic value that can be attributed to paying off a debt.

Which method do you prefer to pay off debt?

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Reading List – 2020

December 29, 2020

This is a compilation of all (most) of the books I’ve read during 2020. I only recently had the idea to keep track of all the books I’ve read so I’m sure that I’m forgetting some. These are in no particular order, rather separated by non-fiction and fiction. I read a total of 15 books during 2020, where my interest in reading grew tremendously. Some of these are re-reads. I hope to read much more during 2021, I have a large stack of books just waiting to be read! **Potential spoilers in descriptions**

*We may receive a small commission if you purchase any of these books using our links. We appreciate your support!*

Non-Fiction

1.) Deep Work – Cal Newport

“Deep work is the ability to focus without distraction on a cognitively demanding task. It’s a skill that allows you to quickly master complicated information and produce better results in less time. Deep work will make you better at what you do and provide the sense of true fulfillment that comes from craftsmanship. In short, deep work is like a super power in our increasingly competitive twenty-first century economy. And yet, most people have lost the ability to go deep-spending their days instead in a frantic blur of e-mail and social media, not even realizing there’s a better way.” (Click here to view on Amazon)

2.) The Richest Man In Babylon – George S. Clason

“The Richest Man in Babylon, based on “Babylonian parables”, has been hailed as the greatest of all inspirational works on the subject of thrift, financial planning, and personal wealth. In simple language, these fascinating and informative stories set you on a sure path to prosperity and its accompanying joys. A celebrated bestseller, it offers an understanding and a solution to your personal financial problem. Revealed inside are the secrets to acquiring money, keeping money, and making money earn more money.” (Click here to view on Amazon)

3.) The Intelligent Investor – Benjamin Graham

“The greatest investment advisor of the twentieth century, Benjamin Graham, taught and inspired people worldwide. Graham’s philosophy of “value investing” — which shields investors from substantial error and teaches them to develop long-term strategies — has made The Intelligent Investor the stock market bible ever since its original publication in 1949.” (Click here to view on Amazon)

4.) The Book on Managing Rental Properties – Heather & Brandon Turner

“No matter how great you are at finding real estate deals, you could lose everything if you don’t manage your properties correctly. However, being a landlord doesn’t have to mean middle-of-the-night phone calls, costly evictions, or daily frustrations with ungrateful tenants. Being a landlord can be fun―but only if you do it right!” (Click here to view on Amazon)

5.) How Good Is Good Enough – Andy Stanley

“Surely there’s more than one way to get to heaven? Bestselling author Andy Stanley addresses this popular belief held even among Christians. But believing that all good people go to heaven raises major problems, Stanley reveals. Is goodness not rewarded, then? Is Christianity not fair? Maybe not, he says. Readers will find out why Jesus taught that goodness is not even a requirement to enter heaven – and why Christianity is beyond fair. Andy Stanley leads believers and skeptics alike to a grateful awareness of God’s enormous grace and mercy.” (Click here to view on Amazon)

6.) Advice For My Son – Hallmark

“From cell phone etiquette to staying motivated, this book covers a wide range of advice and wisdom to pass along to your son.”

7.) Rich Dad Poor Dad – Robert T. Kiyosaki

“Rich Dad Poor Dad…
• Explodes the myth that you need to earn a high income to become rich
• Challenges the belief that your house is an asset
• Shows parents why they can’t rely on the school system to teach their kids
about money
• Defines once and for all an asset and a liability
• Teaches you what to teach your kids about money for their future financial
success”

(Click here to view on Amazon)

8.) Mr. President: A Book Of U.S. Presidents – George Sullivan

“Offers brief profiles of all forty-three United States presidents, and lists important events that occurred during each president’s administration.” (Click here to view on Amazon)

9.) The Automatic Millionaire – David Bach

“The Automatic Millionaire starts with the powerful story of an average American couple (he’s a low-level manager, she’s a beautician), whose joint income never exceeds $55,000 a year, who somehow manage to own two homes debt-free, put two kids through college, and retire at 55 with more than $1 million in savings. Through their story you’ll learn the surprising fact that you cannot get rich with a budget! You must have a plan to pay yourself that is totally automatic, a plan that will automatically secure your future and pay for your present.” (Click here to view on Amazon)

Fiction

10.) The Oregon Legacy – Dana Fuller Ross

“As Toby Holt battles to save his ranch from the harsh winter weather of 1887, his headstrong son, Tim, sets out to seek his fortune in the silver mines.” (Click here to view on Amazon)

11.) A Game of Thrones – George R. R. Martin

“Winter is coming. Such is the stern motto of House Stark, the northernmost of the fiefdoms that owe allegiance to King Robert Baratheon in far-off King’s Landing. There Eddard Stark of Winterfell rules in Robert’s name. There his family dwells in peace and comfort: his proud wife, Catelyn; his sons Robb, Brandon, and Rickon; his daughters Sansa and Arya; and his bastard son, Jon Snow. Far to the north, behind the towering Wall, lie savage Wildings and worse—unnatural things relegated to myth during the centuries-long summer, but proving all too real and all too deadly in the turning of the season.” (Click here to view on Amazon)

12.) A Clash of Kings – George R. R. Martin

“The Iron Throne once united the Sunset Lands, but King Robert is dead, his widow is a traitor to his memory, and his surviving brothers are set on a path of war amongst themselves. At King’s Landing, the head of Lord Eddard Stark rots on a spike for all to see. His daughter Sansa is betrothed still to his killer’s son Joffrey – Queen Cersei’s son, though not the son of her late husband Robert. Even so, Joffrey is now a boy-king, Cersei is his regent, and war is inevitable.” (Click here to view on Amazon)

13.) A Storm of Swords – George R. R. Martin

“Of the five contenders for power, one is dead, another in disfavor, and still the wars rage as violently as ever, as alliances are made and broken. Joffrey, of House Lannister, sits on the Iron Throne, the uneasy ruler of the land of the Seven Kingdoms. His most bitter rival, Lord Stannis, stands defeated and disgraced, the victim of the jealous sorceress who holds him in her evil thrall. But young Robb, of House Stark, still rules the North from the fortress of Riverrun. Robb plots against his despised Lannister enemies, even as they hold his sister hostage at King’s Landing, the seat of the Iron Throne. Meanwhile, making her way across a blood-drenched continent is the exiled queen, Daenerys, mistress of the only three dragons still left in the world.” (Click here to view on Amazon)

14.) A Feast For Crows – George R. R. Martin

“It seems too good to be true. After centuries of bitter strife and fatal treachery, the seven powers dividing the land have decimated one another into an uneasy truce. Or so it appears. . . . With the death of the monstrous King Joffrey, Cersei is ruling as regent in King’s Landing. Robb Stark’s demise has broken the back of the Northern rebels, and his siblings are scattered throughout the kingdom like seeds on barren soil. Few legitimate claims to the once desperately sought Iron Throne still exist—or they are held in hands too weak or too distant to wield them effectively. The war, which raged out of control for so long, has burned itself out.” (Click here to view on Amazon)

15.) A Dance With Dragons – George R. R. Martin

“In the aftermath of a colossal battle, the future of the Seven Kingdoms hangs in the balance—beset by newly emerging threats from every direction. In the east, Daenerys Targaryen, the last scion of House Targaryen, rules with her three dragons as queen of a city built on dust and death. But Daenerys has thousands of enemies, and many have set out to find her. As they gather, one young man embarks upon his own quest for the queen, with an entirely different goal in mind.” (Click here to view on Amazon)

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What Are The 2021 Tax Brackets?

December 25, 2020

There are seven tax brackets for the year 2021: 10%, 12%, 22%, 24%, 32%, 35% and 37%. The income thresholds are adjusted each year for inflation based on the Chained Consumer Price Index.

2021 Federal Income Tax Brackets and Rates for Single Filers, Married Couples Filing Jointly, Married Couples Filing Separately and Heads of Households

2021 Standard Deduction

2021 Long-Term Capital Gains

Long-term capital gains are taxed at a different rate than ordinary income. Here are the brackets for 2021:

2021 Annual Gift Exclusion

$15,000 of gifts to any person are excluded from tax. For 2021, the exclusion is $159,000 for gifts to spouses who are not United States citizens.

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What’s Included In The New $900 Billion Stimulus Package?

December 21, 2020

The house and senate leaders reached a deal late Sunday night on a $900 billion dollar stimulus package. The bill includes direct payments to individuals, small business loans, unemployment benefits, school and child care funding, nutrition assistance, rental assistance, grants for live venues, payroll tax repayment, and funding for hospitals and vaccines. The bill is expected to be brought to vote on Monday.

Stimulus Checks

Direct payments of $600 will be sent to eligible individuals. This is half of the amount that was sent in the previous stimulus package. Eligible families will also receive $600 per child.

Similar to the last stimulus there is an income phaseout that starts at an adjusted gross income of $75,000 and ends at $99,000.

Small Business Loans

The bill will bring back the Paycheck Protection Program from earlier this year. Eligible businesses will need to have fewer than 300 employees and have seen drops of at least 25% of revenue during the first, second or third quarter of 2020. The amount a business can receive has been lowered from $10 million to $2 million.

Unemployment Benefits

The bill will provide a $300 weekly benefit for the unemployed. this is half of the amount from the previous stimulus. This will continue until March 14, 2021.

School and Child Care Funding

The bill will provide $82 billion in aid for schools K-12 and an additional $10 billion for child care providers.

Nutrition Assistance

The bill will send $400 million to food banks and food pantries. It will also increase SNAP benefits by 15% for 6 months. $175 million will be used to provide nutrition services for seniors.

Rental Assistance

The bill will provide $25 billion in rental assistance for various uses. It will also extend the eviction moratorium until January 31st, 2021.

Grants For Live Venues

The bill will provide $15 billion for live venues, museum operators and theaters that have lost at least 25% of their revenues.

Payroll Tax Repayment

The payroll tax deferment executive action that President Trump signed in August was to be paid by by April 30th, 2021 has now been extended to the end of 2021.

Funding for Hospitals and Vaccines

The bill will provide $3 billion for hospitals and health care providers, $20 billion for the purchase of vaccines, $8 billion for vaccine distribution and $20 billion to assist with testing.

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5 Quick Tips To Save More In Your 20s

November 23, 2020

Making small, avoidable mistakes with your money in your 20s can have a significant impact on your overall financial health as you get older. Creating good financial habits while you’re young will give you the ability to get ahead. Saving money in your 20s can give you the freedom to buy a house, switch jobs and even retire early. These 5 tips will get you started in the right direction.

1.) Start Investing

Compound interest is one of the most impactful financial assets available. Interest is the amount earned on the initial principle, compound interest then occurs when you earn interest on your interest and your initial principle. An extra few years of compound interest can amount to a massive amount of money.

2.) Contribute Enough Into Your 401(k) To Get The Maximum Match From Your Employer

The way 401k match typically works is the employer will match a percentage of employee contributions, up to a certain percentage of the employees total salary. For example, an employer might match 100% of an employees contributions up to 3% of their total salary. If the employee earns $50,000 annually the employer will match up to $1,500. This is essentially $1,500 for free. In order to get the maximum match from the employer the employee would need to contribute $1,500 to their 401k. Anything contributed past $1,500 would be unmatched. Contributions into a 401k are tax deferred so there are benefits past just the match from the employer.

3.) Send Some Of Your Paycheck Directly To Your Bank Account

Having an emergency fund saved is one of the most important parts of your financial health. Should a large financial expense arise or if you need to be without income an emergency fund will keep you afloat for a few months. An emergency fund is generally 3-6 months worth of expenses saved in cash or other highly liquid assets. Send enough of your paycheck directly to your bank account to replace all your expenses and maintain your emergency fund.

4.) Think Rationally Before Making Large Purchases

While saving money early on in life is imperative to financial success, spending large amounts of money can be detrimental. Before making large purchases it is important to weigh all of the options. If there’s a need for a vehicle, does it absolutely need to be a brand new vehicle or will a lightly used vehicle work? Is carpooling, walking or cycling an option? How soon is a vehicle needed? Rushed decisions tend to cost more money. If the large purchase is a want rather than a need think about what kind of value it will bring. How many hours of work will be required to afford the purchase? Is there any other option that will provide similar value? Considering many factors regarding large purchases can help to avoid regretful mistakes.

5.) Set Large Obtainable Goals

Set challenging but not unobtainable goals for yourself. Setting goals that you know are too easy won’t motivate you and instead will make you lose interest. Set goals that you’ll constantly have to work towards to make happen. Set both short term and long term goals to keep you focused on smaller immediate goals as well as larger, longer term goals.

The decisions that you make in your 20s will impact your financial health more than any other decade of your life. Now is the time to build a solid foundation to build lasting wealth on. With some discipline and forward thinking anyone can give their finances a great head start.