馃攳
How to Use the Avalanche Method to Pay Off Debt - YouTube
Channel: You Need A Budget (YNAB)
[0]
fun fact did you know heard it from
[1]
hannah is now two years old and second
[3]
fun fact did you know i still get
[5]
nervous every time
[6]
because i do
[12]
howdy folks welcome to herta from hannah
[14]
today we are going to dive deep into the
[16]
avalanche method which is the second of
[18]
two very popular debt payoff methods the
[21]
first being the snowball method which i
[22]
will link above and below now what is
[25]
the avalanche method pretty simple in
[28]
theory you pay off your debts starting
[30]
with the loan with the highest interest
[32]
rate first and then eventually work your
[34]
way down to your loan with your smallest
[36]
interest rate last
[37]
and and then in order in between now i
[40]
would highly recommend watching this
[42]
whole video and probably the whole
[43]
snowball method video but if you're
[45]
wondering just real quick and simple
[47]
what method is better for me if you know
[49]
that you really need that motivation of
[51]
a quick victory a short-term victory the
[53]
snowball method is the way to go for you
[55]
and if you find yourself to be more
[56]
analytical and your bigger concern is
[59]
saving more money in the long run then
[61]
the avalanche method might be the one
[62]
for you so let's go ahead and take a
[64]
peek at what it would look like to use
[66]
the debt avalanche method and seven
[68]
steps to check off along the way so your
[70]
first step is creating a budget i know
[73]
that sounds really cheesy because we are
[74]
a budgeting app that is what we do but i
[76]
swear it's not because i'm biased you
[79]
you really need a budget
[81]
i can't even take myself seriously you
[83]
have to have a budget to safely and
[85]
responsibly pay off your debt because
[87]
you need to be assured every single
[88]
month that you have enough money to
[90]
cover all of your living expenses and
[93]
you also need a budget to know how much
[95]
money you even have left over to throw
[97]
at your debt because if you asked any
[99]
old schmoe on the street what are your
[101]
expenses they're gonna say rent
[103]
utilities gas and groceries but you know
[105]
what they probably aren't gonna say
[106]
they're probably not gonna say oh car
[109]
repairs and home repairs and taking my
[111]
dog to the vet these aren't things we
[113]
think of as our monthly and routine
[114]
expenses but truly they are they're
[117]
totally inevitable expenses that are
[119]
going to happen to us and that's why we
[121]
call them true expenses because truly
[124]
they are our expenses even though
[126]
they're not like the top of the brain
[127]
ones and it's so important that we
[129]
budget for these true expenses because
[131]
these are the ones that typically send
[133]
us into debt we don't go into debt
[135]
buying groceries we go into debt because
[137]
we weren't prepared for the car to break
[139]
down and at the very minimum if nothing
[141]
else have a small emergency fund because
[144]
having our true expenses built up or an
[146]
emergency fund underneath us it's going
[148]
to prevent us from having to take out
[150]
new debt while we're paying off our old
[152]
debt let me tell you it's really hard to
[153]
get rid of something when you keep
[155]
accumulating it and you can make a
[156]
budget any way you want a lot of people
[159]
use spreadsheets you can use a journal
[160]
and a pen we poured our heart and souls
[163]
into designing what we feel is the
[164]
perfect app for budgeting it helps you
[166]
thrive at saving pay off your debt make
[169]
categories for every single individual
[171]
expense in your life and makes sharing a
[173]
budget with a partner that much easier
[175]
so if you would like to learn more about
[177]
using you need a budget click the link
[178]
below to start your free 34 day trial
[181]
second step you're going to add together
[183]
the minimum payments on all of your
[185]
debts add that as an expense into your
[187]
budget and pay those minimum payments
[189]
every single month that seemed like a
[191]
long step maybe that should have been
[192]
more than one i don't want there to be
[194]
any confusion about this no matter what
[196]
debt payoff method you use you have to
[198]
make those minimum payments on every
[200]
loan every single month i also just have
[202]
to say while we're here right now making
[205]
the minimum payments on your debts might
[206]
be all you can do and that is totally
[209]
okay but one day you may find that you
[211]
have a little bit of extra money left at
[213]
the end of every month and that's the
[215]
money we're gonna use to implement the
[217]
avalanche method so the third step is
[219]
you're going to arrange your debts by
[221]
their interest rate from the highest
[223]
interest rate to the lowest so right
[225]
here i have myself
[227]
some loans we have a medical loan for 2
[230]
800
[231]
a credit card for 19 000 and an auto
[234]
loan for 12 000. but remember we're not
[236]
worrying about the balance it's the
[238]
interest rate that we are interested in
[241]
so the medical loan actually has a zero
[243]
percent interest rate thank you the
[245]
credit card 24 and the auto loan six
[248]
percent that being said we're gonna
[250]
start by paying off the credit card then
[252]
we're gonna move to the car loan and
[254]
last we're gonna finish with the medical
[255]
loan fourth step after all of our
[258]
expenses are safely covered in our
[260]
budget and we've paid the minimum
[261]
payments on each of our three debts any
[264]
money i have left over that wasn't built
[266]
into the budget or put toward these
[267]
minimum payments that's what we're going
[269]
to throw on top of our credit card
[272]
payment i have 80 left that i didn't
[274]
build into my budget and i didn't use it
[276]
to pay off one of these loans so not
[278]
only am i going to pay the 400 minimum
[280]
payment for this credit card but i'm
[282]
gonna throw that extra eighty dollars on
[284]
top making it a four hundred and eighty
[286]
dollar payment now just so you know the
[288]
severity of a twenty four percent
[289]
interest rate twenty four percent of
[291]
nineteen thousand dollars is four
[293]
thousand five hundred and sixty dollars
[295]
also worth noting that this credit card
[298]
with this whole situation would have
[299]
taken 12 years and eight months to pay
[302]
off if we only made the minimum payments
[304]
every month that's how intense a 24
[307]
interest rate is and any extra money
[309]
that we're able to throw at our credit
[311]
card is going to send that overall
[313]
balance down faster and faster which
[315]
means less interest is going to
[316]
accumulate over time we're just going to
[318]
keep repeating this process every month
[320]
making sure all expenses are fully
[322]
covered in our budget making all the
[323]
minimum payments on all of our debts and
[325]
then throwing any extra money we have at
[328]
our debt with the highest interest rate
[330]
and eventually we'll get to the point
[332]
where this bad boy this credit card he's
[334]
paid off hallelujah pop a bottle of
[336]
champagne or something cause that's like
[338]
a huge deal but when we do pay off that
[341]
first debt we're actually going to pause
[343]
because now we don't have to make this
[345]
400 minimum payment every month which
[347]
means we have 400 extra dollars freed up
[350]
now most people teaching you the
[352]
avalanche method would tell you to just
[354]
start throwing it at the next debt with
[356]
the next highest interest rate right
[357]
away but at ynab we like to do it a
[359]
little differently because
[361]
why did you get into your debt in the
[362]
first place it's because we didn't have
[364]
the money we needed for something at the
[366]
time so we had to borrow it from
[367]
somewhere else and if we just keep
[369]
throwing our extra money that we free up
[372]
at our debt then we might actually end
[374]
up in the same situation again and lord
[376]
knows the last thing i want to do is
[378]
take out more of that i just paid off a
[380]
19 000 credit card
[383]
no no no if you feel like you are always
[385]
living on the financial edge then maybe
[388]
we should take some of this 400 that we
[390]
just freed back up again and put it
[392]
toward those expenses that tend to send
[394]
us into debt or areas where we tend to
[396]
run out of money if your car is one of
[398]
the things that keeps breaking down and
[399]
making you have to take out more debt
[401]
then maybe we should take some of those
[402]
400 we just freed up and put it toward
[405]
car repairs or a new car so let's do
[407]
that let's say for today's example i'm
[409]
gonna take two hundred dollars of this
[411]
four hundred dollars i just got back to
[413]
my name and i'm gonna put that in my car
[414]
repairs category then i'm gonna take the
[417]
other two hundred dollars i just got
[418]
back to my name and i'm going to add it
[421]
on top of my car loan which is the debt
[423]
with the next highest interest rate so
[425]
every month i'm going to lather rinse
[427]
repeat i'm going to cover all my
[428]
expenses in my budget i'm going to make
[430]
all my minimum payments and then any
[432]
leftover money we have after the budget
[434]
is filled out and the minimum payments
[436]
are made is going to go toward this debt
[438]
with the next highest interest rate so
[440]
i'm going to pay the 250 minimum and i'm
[443]
going to add 200 on top of that which
[445]
means i'm going to be paying 450
[448]
every month toward this car luckily this
[450]
is a six percent interest rate so it's
[452]
not going to accumulate quite as fast if
[455]
i only paid the minimum payment amount
[458]
on this auto loan every month it would
[459]
take me four years and eight months to
[461]
pay it off but now it's gonna take me
[463]
like half the time because i'm putting
[465]
400 toward it every month which that's
[467]
like a big deal that's almost a double
[469]
payment every month right am i right
[471]
it's okay you can clap then the next
[473]
month comes i'm gonna make sure all my
[475]
expenses are covered in my budget pay
[477]
the minimum payments and any money left
[479]
over gonna toss right back at this auto
[480]
loan until one day it's gone too adios
[483]
see you later and that brings us to our
[486]
seventh step which is
[488]
keep repeating this process until one
[489]
day all of those debts are gone now all
[492]
i have left is this medical loan which
[494]
honestly at this amount in this minimum
[497]
payment with no interest rate this
[499]
medical loan might be gone by the time i
[501]
finish the other two because it's so
[503]
small and there's no interest
[504]
accumulating but let's for the sake of
[506]
the example say that i still have like a
[508]
thousand dollars left to pay on this
[509]
medical loan follow that process again
[511]
cover all my expenses in my budget make
[513]
my 125 dollar minimum payment on this
[516]
final medical loan and now that the auto
[518]
loan's gone i'm gonna repeat step five
[520]
again i'm gonna pause and i'm gonna say
[522]
wait a second should i send this 450
[525]
that i just freed up toward my debt or
[528]
is there another spot in the budget that
[530]
needs more padding more security and you
[532]
know what maybe this time there's
[533]
there's nothing wrong i have a lot
[535]
budgeted for car repairs and home
[537]
improvements this time i just want to
[539]
take the family on a vacay so i mean
[541]
this is a small medical loan it also has
[543]
zero percent interest so i mean i don't
[546]
need to throw 575 dollars toward this
[548]
tiny loan every month sure could and
[550]
it'd be gone before we know it but i
[552]
could also start putting aside 200 every
[555]
month for a vacation
[557]
or maybe 300 or maybe like five because
[560]
yeah we want to pay our debt off but we
[562]
also want to live our lives and now i'm
[564]
feeling really financially secure i know
[567]
that my expenses are all covered in my
[568]
budget every month my two biggest debts
[571]
are gone this little medical loan is
[573]
accumulating no interest so yeah i'm
[575]
gonna start budgeting for a vacation and
[577]
keep making the minimum payment on this
[579]
i might throw some extra at it maybe
[581]
i'll put 300 a month toward this but
[583]
it's gonna be gone in like two or three
[585]
months so you can definitely see how the
[588]
avalanche method helps you save money if
[591]
i did the snowball method in this
[593]
situation
[594]
this would not turn out good think about
[597]
it if i started by paying off my
[599]
smallest loan it has the zero percent
[601]
interest rate this is like this should
[603]
be our lowest priority but in the
[605]
snowball method we would be paying off
[606]
the medical loan first then we would
[608]
jump to the auto loan which is gonna
[610]
take a while it's twelve thousand
[612]
dollars then that means we'd be letting
[614]
this almost twenty thousand dollar
[616]
credit card with 24 interest we're gonna
[619]
be letting this accumulate for months
[621]
and months oh no no no no no no no no no
[625]
this
[625]
is the perfect scenario for the
[627]
avalanche method and don't forget that
[629]
at any point during your debt payoff
[631]
process you could pause and say wait i
[633]
don't want to throw so much extra money
[635]
at my debt i need to pad my budget a
[637]
little bit more or if you've been really
[639]
focused on padding the budget and
[640]
building up those true expenses you
[642]
could also do the opposite and say i
[644]
don't think i need to put this much
[646]
toward car repairs every month i'm going
[648]
to start sending a little bit of that
[649]
back toward my debt it offers a lot of
[651]
flexibility and it creates really good
[654]
discipline which like
[656]
almost all of us need more of right and
[658]
if you really want to slay your debt
[660]
fast and know how to save extra money or
[662]
how to pay off your debt by a certain
[664]
date ynab has an amazing loan planner
[667]
tool so let's say you have a goal of
[668]
getting rid of all your debt in two
[670]
years it's february 2022 right now so if
[673]
i select february 2024 it will tell me
[676]
exactly how much i need to make toward
[678]
my monthly payment every month to pay
[680]
off that debt by february 2024 or if i
[683]
get a bump in income or realize that i
[685]
actually have more money to put toward
[687]
my debt than i thought then i can tell
[689]
the loan planner how much i want to pay
[690]
toward that debt every month and not
[692]
only will it tell us when we'll pay it
[694]
off by but it also tells us how much
[696]
we're going to save in interest so if
[698]
you're interested sign up for a free
[700]
trial with ynab play around with our
[702]
loan planner and see what you're capable
[704]
of you can pay this debt off and you
[706]
will pay this debt off just like jenny
[709]
in today's ynab win
[713]
jenny says at the end of last year i
[715]
fully embraced the ynab method and paid
[717]
off 64
[719]
of my debt in 2021 my goal is to kick
[722]
the rest to the curb in 2022 and i have
[724]
some big savings goals lined up after
[726]
that
[727]
jenny
[728]
sick so good congrats enjoy your freedom
[732]
i love your motivation you're gonna
[733]
crush it this year and i'm pumped 2022
[737]
watch out jenny's common thank you so
[739]
much for tuning in today best of luck on
[741]
your debt payoff journey and i'll see
[743]
you in the next video
[747]
sounds cheesy and i swear across my
[749]
heart hope to die it is not just because
[752]
we're i don't know to die i don't want
[753]
to see that i want to hope to be alive
[755]
or dang it why did my dog have to eat
[758]
his own foot wait no he no oh my gosh
[762]
why is it so odd hair look alive
Most Recent Videos:
You can go back to the homepage right here: Homepage