Beyond the Snowball: Tailored Debt Repayment Plans

Debt Repayment Strategies Unveiled | Bryan Foltice Behavioral Finance Podcast

In this episode of the Bryan Foltice Behavioral Finance Podcast, host Dr. Bryan Foltice dives into debt repayment strategies. Dr. Foltice discusses the growing issue of consumer debt in the U.S. and reveals different methods to tackle it, including the snowball, avalanche, and snowflake methods. He also introduces a hybrid repayment approach. Additionally, he offers advice for new graduates on balancing debt repayment with retirement savings. Don't miss this insightful episode to help you or someone you know get out of debt more effectively.

00:00 Introduction to the Podcast
00:26 Understanding Debt Repayment Strategies
06:54 The Snowball Method Explained
09:33 The Avalanche Method: Pros and Cons
11:25 The Snowflake Method: Small Wins
15:36 Hybrid Approach to Debt Repayment
18:49 Conclusion and Final Thoughts

Transcript

0:04

Welcome to the Brian Foltis behavioral finance podcast, where we unravel the mysteries of behavioral finance and unlock the secrets to making smarter, more informed decisions with your money. Now, here's your host, Dr. Brian Foltis. Hello, and welcome everybody to the Brian Foltis behavioral finance podcast. My name is Brian Foltis. And today Day we are going to talk about debt repayment strategies and learn about the different types of strategies and be able to talk the same language around those and try to choose one that fits yourself or at least those around you that you're trying to help out if you're not in debt, to maximize their efficiency in order to get. Out of this thing called consumer debt. And we see this rising each day, the numbers in the U S keep rising. We're starting to talk in trillions and that's just for credit card debt and people maxing out credit cards, getting into this debt and my whole voice here is trying to get people. Out of debt as fast as possible and efficiently as possible. And this comes off the back of the. Money Strong program that is almost ready to go. It's all getting organized and set up and getting ready to launch here in the next month. And I'm super excited to get that rolled out here around spring break time. And when we talk about getting out of debt, we talk about the different repayment strategies. That's what we're going to talk about today. When we come back, we're going to talk again about the different intensity levels and we're just going to break down the different intensity levels. And my approach to working your way through debt is not a one approach method. Mine's a little bit different and what I want to Is I want to take a step back, lay out the different methods, have people choose which one best fits them, because not everyone is going to follow the same method, not everybody is going to thrive under the same intensity levels, and so you're going to notice here when we have old school Dave Ramsey talking about the snowball method and that's the way to go. For some people that's totally fine. We're going to break that down, why that's good, why it might not be good. And then the same thing with the intensity levels that it's just all in until you can't do it anymore. And then you're just going to rice and beans this until you get out of debt. And I think that has a really good intention behind it, but it often fails because people aren't always wired like that to just go hardcore in order to reach their goals. And that's where I want us to take a step back and try to identify, Hey, I'm this type of person, or I'm not this type of person. And we'll get into that method in that future episode. But I'm excited to talk about that because I think we need to really Break it down in a way different way instead of saying with a heavy hand, like this is the only way you either do it or you don't. And so when we're talking about these repayment methods when I'm talking to students who are graduating college, a lot of it revolves around student loans and trying to repay those student loans. Where does that fit in with? all of the other financial goals and my retirement savings and how do I allocate that or how do I strategize that. So here's some of my thoughts around that. First of all, before we start talking about the repayment method, when we get a job out of college, we're going to take a look at our employer's offerings for retirement. And usually without, I haven't seen an exception, but if the employer is offering some sort of repayment or matching plan, we're going to take that free money. So even if you have debt, take that retirement contribution. And get that free money, even if they're matching 25 to 50 percent in the world of finance, I have not seen any guaranteed returns of 25 to 50 percent in my world. And so we're going to hop on that. Sometimes you do have to jump into the employee handbook to see this really nice benefit. It's not always flashing. In lights on that benefit handbook, but we want to definitely look through See what that is and set that up before you get your first paycheck That's usually how I tell students to work on their retirement contributions while working on paying down the debt and then If you don't have any debt Then I say we have to take the contribution matching, and usually between 10 to 15 percent we're going to set aside for retirement before you see that first paycheck, so you're not tempted to spend it, and start making some mental accounting notes around how you're going to spend that money, and then, so that's what I'm saying, if you elect your contribution after your first paycheck, it's going to be considered like as a loss, and so you're going to have to cut and make some, even if it is just mental, so just Take that contribution out before you get your first paycheck and you will never miss it because you'll never know what you're missing. And you can do that as a 22 year old coming right out of college. Then you're just setting yourself up. You don't really have to do much else over time because now time is on your side and it's going to be working for you. Nevertheless, friends today. These repayment strategies that we're going to talk about, I've got three of them and then I've got my own fourth one that I'm going to make, but I figured that these three repayment strategies are. Nice to talk about or pretty applicable today as I'm sitting here in my home office in the middle of February in Indianapolis, Indiana, looking at the snow outside and having walked my dog in the negative seven degree. That's Fahrenheit, windshield, then I feel like these payment strategies are pretty appropriate right now. First one, this is the popular snowball method. So the repayment strategy, you have this debt, we're going to line them up. As a snowball method, and we're going to try to pay off the small balances first of that first in line has the smallest balance, and then we'll stack them up in order from smallest balance to largest balance, and this actually has some benefits to it, and we're not really discriminating against the different interest rates that we're paying on it. What we're essentially trying to do is just get some momentum, get some small wins. Get some clarity and clean up on if we have a number or a large number of debts starts to clean up. So there's some emotional wins behind that. And that's why I think Dave Ramsey really likes to push that because it starts to get some momentum, builds that emotional aspect that we can't overlook here as we're starting to. Work our way out of debt and so the snowmobile method that's been this commonly accepted method to pay off loans. The con though around the snowball method is that the smallest to largest balance doesn't discriminate against interest rates. So what I mean by that is if you have small balances with small interest rates, then, and you have big balances with high interest rates making minimum payments on your large balances while you're knocking out the small ones is a gonna mathematically accrue more interest. over time. So you might be paying a lot more interest based on your circumstances. If you are doing this snowball method. Now, if you have marginally different numbers from an interest rate standpoint, over a short amount of time, this is not going to really have a significant effect on overall interest paid. But it's definitely something that you want to keep an eye on. If you have an outlier, you want that is super high in interest rate compared to your other debts. Let's scrap the snowmall method and let's start attacking that one ugly duckling that's in your debt portfolio and get that out of the way. And actually. That is the second repayment strategy. So instead of the snowball strategy, we're going to work on the avalanche strategy. Now avalanche strategy reorders your debts based on high interest loans first. So here we basically sort it from top to bottom based on highest interest. That. Is from a mathematical standpoint going to save you the most money on interest paid. Now, you don't always have the psychological wins because you might, and here's what I mean by psychological wins. If you have a high interest, high balance loan at the top of your list and you're working your way through it, you're slugging your way through it and it's not going away. This is where you don't get those mental wins. And that's where on paper, yes, avalanche method is the best for interest paid. And, but in reality, if you get frustrated or bogged down and it leads you to. inaction, then this is not the thing for you. And that's where this comes down to the individual and really taking a step back going. I need some mental wins or I really just want to get these annoying debts out and I want them out of my life. And then I will just move on and I'm not going to do this anymore. If you are stacking these up and just know I'm going to get frustrated or I'm really not, I'm not sure how to do this. Then you want to do the snowball method, trying to pay those small balances first. So you have the snowball method, paying off small balances first. You have the avalanche method. That works on paying high interest loans first. And then you have what we call the snowflake method. So you have these two large bodies with snowball and that's supposed to, as it rolls down the hill, that's the idea. The snowball gets larger. That's the momentum. That's the wind. The avalanche is just trying to knock it all out in the most efficient way possible. Stacking them up by loans to save money on interest. Snowflake is making small incremental extra payments, small incremental extra payments. Now you can use the snowflake method in isolation. So making minimum payments and then these small incremental payments come in on the side and that's fine. But what I would like to see is using the snowflake method in conjunction. or with the snowmall and avalanche method. So you have your plan that you're trying to execute in order to get out of debt regardless of whether you're stacking them by balance or if you're stacking your loans by interest rate and then whenever you have new money coming in that is adding to the snowball or that is adding to the avalanche not just in isolation and what we mean by these the snowflake small incremental payments This is where the side gigs or we'll talk more about that too, because I've noticed there's some debate around whether or not, these side hustles are good, or how does that fit our overall life purpose and life plan? And I definitely have some strong feelings around that as well. And then, or if you're selling items, just different things like that, any extra money coming in your you're selling pictures of your feet or something online and you get an extra money for that, then that's going to be where that money goes. Maybe more applicable is going to be. Tax refunds coming in you get your tax refund. This is ultimately this behavioral decision of all right How do I account for this? so we say that this money coming in is going to be mentally treated differently as earned money and this is where people go and buy their big screen TVs and really go crazy with their newfound money that they get from these tax returns when could be used in the snowflake method to just pay off your debt or to be treated as earned income and Saved or invested or used to pay back loans appropriately. We've got the three methods And I realized okay, that's this good I at least now when we're talking about how you're going to get out of debt then students and people can We can talk the same language, I'm using the snowball method, or I'm using the avalanche method, got the snowflake method working. I love that. I think that's a really good thing to be able to have a more comprehensive look. Instead of me standing here going, we're going to do the snowball method because I said so. We're going to have a more complete conversation around this. I'll add a little monkey wrench in here because when Mandy and I got married. I just mentioned a month or two ago that she came with her student loans she was still paying off and that was to the tune of about$42,000. And when that happened, I got to see what that looks like.'cause it had been a while since I had gotten out of my student loans. And I usually had mine grouped just in one clump and. That's how I remember paying off my loan. It was just a clump and it's working to work your way down. Hers came in a variety of different amounts and different interest rates. And there wasn't too much discrepancy around the interest rates, but there was a difference between some of them and. I thought to myself here's a great case study around how do we get out of debt? Or what would be our method in order to do this? So this is our fourth method. And it's a hybrid method because what I noticed is we started doing a hybrid method which meant we started as a snowball method where there was some real annoying small balances and we got those things gone and out of the way quickly and then it became a four legged race here with we had four various loans so we quickly went from down to four. When we got down to four, we suddenly switched to this avalanche method where we started paying down the highest interest loans first and worked our way through there and one by one, knocked our way through those. And it also came with the snowflake method. So whenever New money came in or extra money would come in. We would allocate that making those extra payments in order to get out of, and we didn't have a ton of sacrifice. We're in a different position income wise. So this is also really important that when you're paying this off, that if you have buffer or margin in your monthly Budget or financial plan, then you have more slack to do this. Some people who are just living paycheck to paycheck, trying to get by. This is where maybe only the snowflake method would work and a snowball and avalanche have. Have more buffer in there to focus extra money and then add in the snowflakes, if you will, when you have new money coming in. So that's what we used as a hybrid or a variety of the different ones. And the best news around that is that it finally ends. You just get it done when that money is gone. All of a sudden, if you're not totally depriving yourself of expenses. And you're still living a good life, suddenly, that money that you have at the end of every month, or the extra payments that are coming in, suddenly don't have to go to this fucking debt anymore. It can go to something way more fun. So now, it was, it's really nice, because we've already been maxing out 401ks and doing all that. But now Our conversation has truly come to life around all this extra money doesn't have to go towards that bullshit anymore It's going to go towards when we got investing and we're starting to think about Leaning into our backdoor Ross and our HSA's and Mega backdoors like this whole new world of next level investing comes to And so I don't have content in the money strong for college students around that level of savings and investing. But I will have that in our version that we're making as well called money strong for adults. And we'll run that through employers as well. So anyway, we've recapped the repayment strategies. And if somebody asks me, how do I, which method should I use to get out of debt? My cheeky answer will be yes, because it is up to you, which one you think is going to be the most appropriate. My intention is to try to guide you and to get you to the other side. So you get out of debt. So then you can have that extra money going towards investing, wealth building. generational building around that. I'm going to leave you at that. So thank you very much. If you've made it this far, I appreciate you listening. And if you need anything from me, you can always contact me, Brian Foltis. com moneystrong. com is underway here. You can find me on Instagram, on YouTube for a lot of content, and I would love to hear from you. If you like what you hear, please make sure you like and subscribe so you never miss another episode of this show. And I friends will stop talking and we will see you on the next episode. Have a great day. Thanks. Bye. Thank you for tuning in to another episode of the Brian Foltis behavioral finance podcast. We hope you found our exploration into the fascinating world of human behavior and finance, both enlightening and thought provoking. Be sure to subscribe for future episodes and until next time stay curious and financially savvy