debt snowball or avalanche method? why i picked what worked for me

As some of you know, I run at Etsy shop during the holiday season selling hand made video game related ornaments, which I started in 2013 out of desperation after losing my full-time job and struggled to pay bills. By some sort of miracle, the ornaments went viral and have since been a huge hit in the gaming community - even a few game developers/companies purchased some for their own trees.

While I had to use the money made last year for living expenses, bills, and student loan payments (since it was my full-time job for 4 months), this year's income can be used on whatever I want - and that "whatever" happens to be, well, my loans of course.

Since ridding myself of my smallest loan, Nelnet, I have but three loans left in my name (before taking on the $80k parent plus loan): my car ($8k), ACS ($13k), and DOE ($23k). Following Dave Ramsey's debt snowball plan, I knocked out Nelnet first, since it had the smallest balance, and applied the extra $50/mo I now had from that loan on to my next smallest loan, my car. Instead of the minimum $187 something I was paying on my car, I have since bumped the payment up to $235/mo while keeping up with my "40 week money challenge" and putting down a good $400+ payment every 2-3 weeks or so. These things factored in, my estimated pay-off date for the car is somewhere in 2016. Or, would have been at least.

Because of my Etsy shop this year, I have enough money to actually pay off the car. For someone who is trying so hard to rid myself of my debt, this is a huge achievement for me and only puts me that much closer to my end goal.

But is the car the right choice? Taking a look at my debts, if I used the money towards the $13k student loan instead, I could knock it down exponentially. With a 6% interest rate, I would save more money in the long run by getting rid of that first and actually pay off my debts, completely, a month faster than if I used the snowball method.

To help you understand, since I still don't, here it is all laid out with the Etsy money factored in:

SNOWBALL METHOD

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Car: $8,000 (@4%) | ACS: $13,000 (@6%) | DOE: $23,000 (@6%)

The snowball method says I should pay smallest debts first, so this means my car. The money made from Etsy would completely eliminate the car loan, leaving the ACS and DOE student loans and an extra $235/mo to put on ACS. My snowball now looks like this:

ACS: $13,000 @ $110/mo (minimum payment) + $235/mo (money from car loan) = $345/mo

DOE: $23,000 @ $280/mo (minimum payment)

Here is the chart from unbury.me that shows the pay-off dates using this method. DEBT FREE BY SEPTEMBER 2018.

Snowball
Snowball

AVALANCHE METHOD

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Car: $8,000 (@4%) | ACS: $13,000 (@6%) | DOE: $23,000 (@6%)

The avalanche method says I should pay highest interest rate debts first; since the student loans have the same rate, I went with ASC first since it has the lowest balance. The money made from Etsy would leave about $5,000 on ASC, but no extra money to add to my car loan and DOE loan until paid off. My avalanche now looks like this:

ACS: $5,000 @ $110/mo (minimum payment)

DOE: $23,000 @ $280/mo (minimum payment)

Car: $8,000 @ $235/mo (what I am currently paying which is Nelnet + minimum payment)

Here is the chart from unbury.me that shows the pay-off dates using this method. DEBT FREE BY AUGUST 2018.

Avalanche
Avalanche

As you can see, the avalanche method allows me to pay off my debts one month earlier and also saves me around $361 - good deal, no? But while the avalanche method makes the most sense mathematically, there are other factors to consider when paying down student loans - some in which will play a huge role in one's success or downfall.

The mental "win" of completely eliminating an entire loan from your "list" is, to me, more rewarding than the couple hundred bucks I would save by going with the avalanche method. For a lot of people, these wins are essential to keeping you on track. When I actually saw progress, like saying good-bye to Nelnet, I was more motivated and determined than ever to continue on with this treacherous journey, as it was clear the hard work was actually paying off.

Another factor to consider is what the benefits would be to actually paying off something. For me, paying off my car and finally owning it outright had many advantages. No longer financing my car means I don't need the full-coverage with my insurance that every person financing a car is required to have, thus saving myself more money every month with a cheaper insurance rate - money that could, once again, be put towards a loan. Cost benefits weren't the only thing either. A user on Reddit pointed out that if, during an unfortunate turn of events, I happen to lose my job and can no longer afford the monthly payments on my car, the car can easily be repossessed - making it that much harder to get a new job that would obviously require transportation. They cannot, however, repossess my education.

Since I am still awaiting a few payments from Reddit Marketplace and working out tax details, I have yet to actually use the money earned from Etsy on either of these things yet, but after weighing the pros and cons of both the car and student loan, I feel paying off the car will be my best bet. The most important factor in my goal is the speed I pay off these loans - I want them gone and I want them gone fast. With only a month difference in methods, the mental "win" of killing one of my loans and the additional benefits of owning my car outright puts the snowball method in the lead for me.