Debt Payoff That Actually Sticks

We break down how to decide between paying off debt and investing, then lay out a clear plan for tackling multiple balances without losing momentum. Cody compares the snowball method and avalanche method with a simple spreadsheet so you can see how interest, cash flow, and psychology change the outcome.

• Deciding when debt payoff beats investing, based on your situation and timeline
• Defining consumer debt and why I prioritize it before heavy investing
• Freeing up cash flow by removing monthly payments
• Reducing risk when layoffs, medical bills, or repairs hit
• Valuing peace of mind and lower money stress at home
• Handling exceptions like 0% financing without losing the bigger plan
• Keeping the 401k match while redirecting extra dollars to debt
• Using the snowball method to build fast, visible wins
• Using the avalanche method to minimize interest, with slower visible progress
• Choosing the approach you will actually follow through on

To learn more about Stansell Wealth Planning visit:
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469-606-2040

Transcript

Welcome And Debt Management Goals

Speaker 0:16

Hello, welcome back, Stansell Wealth Planning Podcast. Appreciate you joining me. I'm your host, Cody Stansell, financial planner. If you're new here, this is where we go over all the financial planning aspects that affect your money, whether it be investments, insurance, taxes, planning for retirement, debt management, cash flow, all of the different aspects. So I appreciate your time. Whether you're watching on YouTube or listening to this with some other device, I appreciate your time. Today's episode this is details on debt management. So I actually shot an episode last year, a little bit more on the basics of the order in which you should put your debt in order to pay it off. But this is more the detailed version of that. So I wanted to expand on it. Whether you are in your 20s and just graduated college and have student loans and a credit card and a car, or you are mid-50s and it's time to get serious about paying off your debt before you head into retirement, or if you're somewhere in between, this episode is for you. So I appreciate your time. Wanted to run through the many aspects that affect your money. Obviously, one of those is cash flow and debt management, right? So should I pay off my debt or invest my money? I get that a question a lot. If I have if I pay off debt and have multiple debt lines like student loans, mortgages, credit cards, car loans, which one should I pay off first? I get that question a lot too. So, first topic, we'll dive right

Pay Debt Or Keep Investing

Speaker 1:47

in. Paying off debt first, investing your money. Okay. Run into this a lot. So let's say a client has a credit card with an existing balance, which, so keep that in mind. That's a valid point. Of some folks put all their expenses on a credit card, but they paid off at the end of every month. That's you're not carrying a balance, right? So I'm not really talking to you. It's more, yes, Cody, always keep 10 grand, 15, 30 grand on a credit card. That's where we need to get that puppy paid off, right? So you have credit card debt. Let's say you have a car payment, you have a mortgage. But if I have a client that's also contributing to their 401k at work or another investment account like a Roth IRA or a brokerage account, does it make sense to stop your 401k contributions and redirect that cash flow to your debt? Like most answers to financial planning questions, the answer is it depends. So the world of gray, right? It depends on your situation. It depends on how close you are to retirement, depends on how high your debt balance really is, so on and so forth. So hate to say it depends, right? But financial planning is very personalized. That's why it's called personal financial planning. Everyone's situation is a little bit different. But in general, we want you to be consumer debt free before investing your

Why Consumer Debt Hurts

Speaker 3:08

money. So, what does that mean? Whether you're investing in a 401k, like I said, a Roth IRA or any other investment, we want you to be consumer debt free. What is consumer debt? Basically any debt besides your mortgage. Okay. And why do we want to do this? So I have three common reasons. There's several, but the three biggest ones. Number one, to free up your cash flow. We want you to be debt free. So you do not have those debt payments every month. So think of if you did not have a car payment or a credit card payment, how much better cash flow would you have month to month, right? Stack up all of your debt payments and just imagine a world where you didn't have those debt payments, right? How much better would life be? You could take that cash flow and invest even more in the future if you didn't have debt, right? So that's the first one, reducing your debt load of to help your cash flow. Number two, you reduce your risk. Not a lot of people talk about this. Having debt is fine when things are normal, right? It's not a problem until it is, right? So if you're unemployed, life is normal, everything is great, then that's fine having some debt. But as soon as you have an unexpected medical event or a house repair, or God forbid you're laid off, or some of these catastrophic things to your cash, now you don't have an income, or maybe you have a reduced income if your spouse is still working, that debt will now keep compounding and have even a bigger impact and a bigger problem down the road. That's not a lot of people talk about that as a reason to not have debt. Once again, if life is normal, everything's good, having a little bit of debt, no problem. But if you hit some bumps the road, it becomes a big problem, right? So if you still owe on a car loan, you get in a wreck, or your car craps out on you, or whatever it may be, and you owe more than it's worth, you will have to eat that difference, right? Or you're paying for gap insurance, which comes with a cost as well. So that's not a great scenario either, right? So a lot of these reasons to not have a car payment is for those events that may happen in the future that you can't really control. So that's the number two reason. You reduce your risk when you have less debt, right? Number three, uh, of why you want to be consumer debt free, the feeling of owing nobody nothing is pretty sweet. You can't quantify it, aka you can't put a dollar value to it. It gives you peace of mind, it allows you to sleep better. I've been married 14 years and improves your marriage. The number two topic couples fight about is money, right? So if you carry a lower debt load, the weight on your shoulders is less, right? It affects all of your aspects of your life, having less risk and less debt. So those are the three biggest reasons we want you to be debt-free. Yes, I want you to be consumer debt free before investing a lot of money.

Exceptions Like 0% And 401k Match

Speaker 6:08

There's exceptions to all this. Once again, it's the world of gray. It's not black and white. Exceptions, I hear it all the time. Cody, I have a 0% credit card or 0% financing on a couch we bought from Nebraska Furniture. You really want me to pay that off ASAP? And there's always exceptions. No, I'm not gonna fight you that hard on paying off a debt that's a 0%, uh, a 0% loan, right? That's fine. But in general, we want you to be debt-free. In general, if you get a great match from your 401k at work, okay, reduce how much you're contributing to your 401k to just put in what the match is. Let's say they match dollar for dollar up to 4% and you're contributing 10%, okay, and then just back it down to 4%. Keep getting the free money, not going to fight you too hard on that, right? But let's use that other 6% to pay off some of this debt quicker so that you don't have those reasons uh pointed out earlier.

Snowball Vs Avalanche Overview

Speaker 7:08

So now if you have multiple lines of debt and you agree that you want to pay them off ASAP, but which ones first? And how do we go about it? Right. There are two methods that we recommend, two most common ones. And depending on your details, depending on your situation, your debt load, your balance, your personality, your marriage situation. There's a lot of different factors on which one of these two that we recommend over the other. So first one is the snowball method, second one is the avalanche method. Okay. Snowball is lining up your debts from lowest balance to highest balance. So think of balance as snowball. Try to pay off the lowest balance one first while making minimum payments to the other debts. And once that first debt is paid off, then roll that cash flow into the next lowest balance and repeat, right? So that's the snowball method. It comes from, think of a snowball, you start small and it's rolling downhills, can become bigger and bigger. That's the whole point there. Second method is the avalanche method. This is where you line up your debts highest interest rate first and pay that one first while you're making the minimum payments to other ones. So once again, line up all your debts, whichever one has the highest interest rate, prioritize that one. That goes up to the top of the list. Once the highest interest rate one is paid off first, then go to the next highest interest rate, so on and so forth. Okay. So which one should you do? Once again, it depends. The avalanche method saves you the most interest over time. You will be debt free sooner if you follow both of these to a T and you do the avalanche method first. You will save the most interest. You'll be debt-free the soonest. A ton sooner, it depends on everyone's situation, but not drastically sooner. Three months, six months in most cases, you'll be debt free sooner, which is great. Yeah, I want to be debt free as soon as possible. It is the one that most of my clients say, yeah, duh. I want to be, I want to pay the least amount in interest. I want to be debt free the quickest. So I want to pay the highest interest rate first. Let's do the avalanche method. And that's correct, right? There's nothing wrong with that. But it is the method that has slower results and slower progress shown. Okay. So I shouldn't say slower results. It's harder for you to see your progress with the avalanche method. And I'll show you here in a little bit. I'll share my screen here in a little bit. The snowball method pays off debt faster, but costs you a little bit more in the end, since sometimes you make you may be making only the minimum payments to the highest interest interest rates debts. So it causes them to accumulate quicker. So the snowball method is more of a psychological. Let's have a little bit of, let's have some victories along the way. Let's have the smallest balance paid off first, right? That way you have less debts. They used to have four debts, now you have three debts, and it just you accomplish something faster. So in the end, a lot of clients stick with the snowball method, whereas a lot of clients quit on the avalanche method because they're not seeing the results as quickly, right? So that's the biggest difference between the two. Once again, I'll go through a visual. So let me, I'll share my screen.

Snowball Spreadsheet Walkthrough

Speaker 10:27

I apologize. If you are listening, I'm sorry. You may want to hop over to YouTube to see what I'm showing here. And vice versa. If you are watching on YouTube, I may talk slower or overexplain the spreadsheet I'm about to show. Because for those that are listening that can't watch, uh I'm gonna give a little bit more detail. Right. So let me share my screen here. Okay. So I have a spreadsheet here, and I have different tabs showing you the snowball method, avalanche method. These are first month, right? So here is the snowball method. Let's say you have four lines of debt. You have a personal loan of $1,000. That interest rate is 9%. Once again, these are fictional people. I'm making them up, but from what I see, 9% interest rate. So a 9% interest rate on a $1,000 loan, what's the annual interest dollar-wise? What's it costing you? $90 a year, right? And I just made fictitious minimum payments for these amounts over here. So you see these four different loans: a personal loan, a student loan, a credit card, a car loan. Let's add it all up. And let's say you have $49,500 of debt. Notice I don't have your mortgage on here. Once again, this is just a consumer debt. Let's pay it off as quickly as possible. Your mortgage is a different animal. I'll have a different episode about that later of how to be on track to pay off your mortgage as soon as you want to be. $49,500 of debt. Your annual interest, just with all these different interest rates, credit cards, let's say your credit card is at 23%. I've seen credit cards at 28%. If you are in your 30s, 40s, 50s, this is not going to be news to you. Avoid credit cards like the plague. They're the interest rates are ridiculous, right? Even no debt is good per se, but student loans has a reward. Got you a degree, hopefully, and is the reason you're earning more money, but has a purpose. Our car loan, you're using the car, you need a car loan, but there's other reasons. Credit cards, just avoid them as much as you can. So, all in all, with these interest rates and how much you're paying in interest a year, notice this $53 a year of just interest. Those aren't your payments. That's just accumulated interest every year. So as long as you have to be paying at least $6,200 a year to even make a dent in your balance because your interest is accruing by this much. That's over $5,500, or excuse me, $500 a month. That's a big deal, right? So be aware of this. Is why one of the reasons we want you to be debt-free as soon as possible. So notice here the snowball method, I have all these balances lined up from smallest to largest, right? So let's say you have $2,000 a month to pay toward these debts. Okay. Here's your minimum payments. Your student loan minimum payment, $160, your credit card minimum payment, $130. Car payment, let's just say your actual car payment is $650. So those three combined, you're going to be paying $940 for those minimum payments on those three debts. So, but we have in my fictitious scenario here, $2,000 a month that you can throw toward debt. So $940 of that $2,000, excuse me, $2,000 a month will be going to the minimum payments. The other $1,060, we can just we can throw at the very first debt, right? So make your minimum payments, whatever's left over, pack your first debt. Okay. Notice here, if we make, if we pay $1,060 toward this $1,000 loan, it's going to be debt-free. So this is the first month scenario. Notice your balance is $49,500. The snowball method, month two, you won't have a personal loan balance, right? You have it paid off. So this is the point where now we only have three debts that we're dealing with instead of four. So a lot of folks stay with the snowball method because you get quicker results. Now you're making your minimum payments to these bottom two here, right? You won't have a minimum payment on the student loan. So now you have $780 of minimum payments. Now we get to roll $1,220 toward this student loan. And in three or four months, we'll have that puppy paid off, right? So you see how the snowball starts accumulating. And this is where a lot of people stick with the snowball method more because I used to have four debts and now I have three. And then three or four months later, now I have two. And you start to see results a lot quicker.

Avalanche Walkthrough And Progress Problem

Speaker 15:19

Okay. So that's where a lot of people stick with it. Now come to the avalanche method. Same scenario, same debts, same balances, same interest rate, same everything, right? $49,500 debt. But with the avalanche method, we've lined them up highest interest rate first. So notice here our credit card is what we're gonna attack first because it's what's costing us the most in interest every year. Okay. So same methodology, we're making minimum payments. And let's see here, make this one here. We're making $960 of minimum payments to these bottom three loans, which once again frees up $1,040 in what we can throw at the credit card every month. Notice how if we make $1,000, you know, $1,040 payments every month on a $16,000 credit card balance. You notice here the balance is gonna go down every month, but it's gonna take us 16, 17, 18 months maybe with interest to actually have your credit card paid off, right? So you're gonna have these four debts for a year and a half, maybe. And so that's where a lot of people with the avalanche method, they don't see the results. They still have four debts. Yes, your balance is going down, but you're not, you still have those same debts. And so it feels like you're going nowhere. You're not really making as much progress. So, from my experience, when people choose the avalanche method, they give up easier. They just don't see the results, right? Snowball method, it's gonna cost you a little bit more in interest over time, but you stick with it more, from my experience, what I've seen from clients. So the avalanche method, second month, once again, we made $1,000 and 60 months of or $1,000 of payments, but once again, it still has an interest rate, so accrued interest that month. So notice here at the end of the second month with the avalanche method, we still owe $48,021 with the snowball method. We still owe $48,740. Notice here, you owe less. You made more progress with the avalanche method in month one, right? You're about $53 ahead of where you'd be with the snowball method. So some people look at that and say, great, I want my balance to be as low as possible. I want to be done as quickly as possible. But you see, my what I'm saying, you it appears your progress is better with the snowball method. Okay. So once again, if we can get this knocked out as soon as possible, everyone is different in how you go about it. Once again, I professionally see more client success with the snowball method. If this sounds silly to you, I have a lot of clients that there's something about people feel more pride in the avalanche method. Yeah, I'm not that stupid. I'm not gonna do any other method. I'm gonna pay the least amount of interest and have it paid off as quickly as possible. And that's fine.

Motivation, Trusting The Process

Speaker 18:27

But the example that I use, if you want to get in shape and you want to lose weight and feel better, you start working out, you're eating, you step on the scale two weeks in and you see no change in your weight. So you say, okay, so you keep working out, you keep eating, and then three weeks after that, you weigh yourself again, and it's still the exact same number on the scale, you are going to give up. That's just how it is. If I go on a diet and I'm working out hardcore for six weeks straight and I see no progress, you're going to give up, or you're going to slack on your budget or slack on your diet, or not go to the gym as much. You're going to mentally give up, right? And that's what the avalanche method is. You don't really see results for a long time. You still have four debts, you're still going through all of that. So that's the best example I can give. If you trust the process, maybe you're in your 50s and you've said, Cody, enough is enough. I've always had debt. I'm mature enough. I'm serious enough. I'm going to get this debt behind me. And you trust the process, then go with the avalanche method, attack it hardcore. You're going to end up on top quicker with that method. But if you're on the fence, you're not really taking it seriously. I always recommend the snowball method to clients because it they see the reward sooner.

How To Get Help And Wrap Up

Speaker 19:48

Hope this helps. As always, everyone's situation is a little bit different. Everyone's balance of these debts is a little bit different. The interest rate is different. The minimum payments are different. Your situation, maybe you're married with two incomes, or you're single with one income, or married, but only have one income. Everyone's situation is a little bit different, right? So if you have any questions, if you would love to meet up to go over these details, I'm free at any time. Please reach out to us. Cody at stancelwealth.com is my email, or you can call us 469-606-2040. Thank you guys. Have a good rest of your day. Thank you for listening to the Stansell Wealth Podcast. This podcast is for informational and educational purposes only. It is general in nature and may not apply to your specific situation. Please consult with a professional before acting on any information shared in this podcast pertaining to financial, investment, legal, or tax advice. The views expressed by Cody and his guests do not necessarily represent those of Charles Schwab, Victory Financial Group, or any other organization.