Let it snow, let it snow, let all that debt go...

December 16, 2021
Avril Liljekvist

Getting Rid of Debt

The opportunity will arise at some point to sit down and have a really good look at our debt. It can feel a little bit like opening the cupboard we've been just putting everything in to deal with “later”, and there's likely to be some anxiety around actually assessing it, but that's okay. Breathe deep. We've got this.

Once we know what our debt is, there are different ways we can deal with it (and not by putting it back in the cupboard). Debt is just a tool in our toolkit, remember, so let's look at what we do with it when we decide we don't need that tool right now, and we have some extra money to pay it off.

Snowball Method

This method is great for building your confidence and making immediate progress. Let's say I have $300 per month extra that I want to put towards paying off my debts.

I list my debts from the smallest amount to the highest amount. It looks something like this:

Personal loan - $4,000 (repayments $400/month – 11% interest)

Credit card - $8,000 (repayments $200/month – 19% interest)

Mortgage - $285,000 (repayments $1,300/month – 3.5% interest)

With this method, I would add my extra money to the smallest debt first. I adjust my regular repayment on the personal loan to $700/month and keep the other repayments as they are. After six months, my personal loan is repaid (yay!) and instead of that $700 going back into my budget, I change my credit card repayments to add this amount too – making it $900/month. That debt is paid off in nine months or so, and now I have $900 extra to add to my mortgage repayments, so I change that repayment to $2,200 per month.

Tackling the smallest debt first can help you feel less anxious about the number of debts you have, and positively reinforce the new habit you've set about making those extra repayments.

Avalanche Method

This method works much the same as the snowball, but we tackle debt in order of highest to lowest interest rate. This time the order for my debts looks like this:

Credit card - $8,000 (repayments $200/month – 19% interest)

Personal loan - $4,000 (repayments $400/month – 11% interest)

Mortgage - $285,000 (repayments $1,300/month – 3.5% interest)

I do the same as before and add my extra $300 to the first one on the list, getting that credit card paid off first and then adding those repayments to the next debt. When the personal loan is paid off, the repayments get added to the mortgage. The main advantage of this method means that you're saving yourself more money in the long run by addressing your higher interest debts first. The downside is that it might take a bit longer to get that first one paid off, and you'll need to be disciplined to stay on track.

What else should I consider?

Our attitude to debt is a lot like our attitude to risk – it's personal, and it doesn't have to be rational.

It's okay to not want to have any debt at all, and to continue down the list of things you owe until everything is paid off, and you know that there aren't any demands on your future income. It's also okay to decide that you won't prioritise some debt repayments – like choosing to pay off the student loans with tax contributions only, as the indexation means they're only accruing 1.8% interest, and you want to invest your money elsewhere.

The important thing is taking the time to really think about what works for you, and then making a plan to achieve the best outcome with your situation and your goals in mind.

* The information provided in this article is general information only and does not take into account your objectives, financial situation or needs. Before making a financial decision, please assess the appropriateness of the information to your individual circumstances and consider seeking professional advice.

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