There are two types of people in the world. Those who are equipped for a zombie apocalypse, and those who are ‘dinner’. Because when it comes to debt, it’s eat or be eaten.
Great, now that we have decided to choose life and get rid of the zombies and our debt, the question is: how do we actually do that? And because different folks like different strokes, I will outline two approaches. (I deliberately say “approaches” because that is how one climbs a mountain, and paying off debt is not unlike climbing a mountain. And, also, I like analogies. Warning: we may meet some zombies on the mountains.)
1. The Avalanche Method
This school of thought says get rid of your most expensive debt first. And by expensive we mean the debt with the highest interest.
To illustrate: You have a loan of R1000 at 9% interest, and R15000 owing on your credit card at 25% interest.
Mathematically, it makes sense to pay off the credit card first because it is charging the most interest. Kill the 25% zombie first, and you will end up paying less interest over time. Which also means you’ll free up some money, which will then allow you to squash your other debts quicker. Which is why it’s called the Avalanche Method: the idea is to wipe out as much as you can, as quickly as you can.
The other thing about avalanches, though, is that it’s harder to see their effect while they’re happening; it’s only once they’re finished that you really see how destructive they were. So you have to be quite calculated and rational to know what’s actually going on under all that snow. It’s about numbers and percentages, and if you get that, you know that zombies are getting buried even if you can’t see them.
(A small note to self: it’s still crucial to keep up to date with the minimum monthly repayments on your other debts. Not paying them will result in penalties for late fees, hindering any mountain conquering progress.)
If you like maths and stats more than mimes and rhymes, this is a good way for you to approach your debt. Of course, we know that for some people debt is more of an emotional mountain to climb. Luckily, there is an alternative approach.
2.The Snowball Method
This is more of a psychological attack on the problem, which is basically to pay off the smallest amounts first, (again, not forgetting to keep up with your other monthly minimum debt repayments).
So, in the above example, you’d tackle the R1000 loan as soon as possible. Psychologically, it’s not as intimidating as R15000, and by paying off the smaller debts, slowly but surely, you are taking active, measurable steps to that debt-free holy grail.
It’s called the Snowball Method because of those cartoons we used to watch, where the seemingly insignificant snowball starts rolling its way down a mountain, gradually picking up snow, getting bigger and bigger and eventually becoming a behemoth.
With the Snowball Method, there are visible signs of progress as you go. And the feel-good factor you’ll get from paying one debt off may encourage you to fight the next zombie with more confidence.
Look at it this way
I know. It’s weird that with both analogies, you start at the top of the mountain, right? Maybe that’s because if the mountain is your debt, then you want it to be “going down” (erm…)? But okay, if it helps you to think about it by starting at the bottom, then look at it this way…
With the Avalanche method, you’re taking the most direct route – straight up. It’s steeper, so it’s harder, but if you stick with it, you will make faster progress. With the Snowball method, you’re slowly wrapping around the mountain, ascending gradually, because you don’t want to get altitude sickness and be a sitting duck for the snow zombie.
So which is best?
Well, studies show that you are actually more likely to pay your debt via the Snowball method. And in a way that makes sense – fewer of us are rational and mathematical about zombie encounters. There’s a great quote that says life is all about small victories. So Snowballers do best chopping zombie toes off one at a time, then the feet, then the legs, and having mildly petrified victories at each amputation.
On the other hand, if you’re disciplined enough, you might like to do it the Avalanchers’ way: delay your gratification and enjoy a bigger victory, later. The zombie may be scarier initially, but when you drive a stake through his heart and watch him explode spectacularly, it will all have been worth it.