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Snowballing VS. Stacking

Often we get the question, what is the best plan to pay off debt? There are two main debt payoff plans that most people are aware of, Snowballing, and Stacking.

Snowballing is the process of paying off the lowest debt first and paying the minimum on their other debt. As you pay off the lowest debt, you moved to the second lowest, and so on and so forth.

Stacking is the process of paying off the highest interest debt first, paying the minimum on the other debt. Then as you pay off debt, go to the next highest, and so on and so forth.

snowballing, stacking, paying off debt — Snowballing VS Stacking

There are pluses and minuses for both processes with the optimal goal of both to pay off your debt!!

Pro’s and Con’s of both

Snowballing– The biggest pro of snowballing is that there is an innate sense of satisfaction when you pay off smaller debt first. It moves quicker, and you are more likely to stay motivated. Also as you pay down, and off debt, you’ve got more money to apply to the next card and so on.

The biggest con of snowballing is that if your largest debt has the highest interest rate, you will probably pay more over the life of the debt.

Stacking– The biggest pro of stacking is that you pay the least amount of interest since you’re attacking the higher interest debt first.

The biggest con is that if your biggest debt is also your higher interest rate, it will take you longer to pay it off regardless. Sometimes this can be frustrating and too slow for the average consumer who wants to see immediate results of their work

While there are pro’s and con’s for both of these plans, they do share similarities. The premise is the same in that you have to list your debt, and interest rate if that applies, and you’re paying all extra money towards one debt, and minimum payments towards the others. As you pay off debt, you take that extra money and apply it to the next debt. It’s an avalanche of sorts as your money starts to grow towards paying down the debt. This in itself can be very motivating towards paying it down.

What it comes down to is a personal preference in my opinion. Experts can argue and agree to disagree about what’s best. It really depends on each different circumstance. Depending on amounts and interest rates.

If you’ve got 4 credit cards that all have $1000 on them. Then it makes more sense to go with paying down the higher interest rate first.

But if you’ve got 4 cards, each with different totals, like $10k, $6k, $2k, $1k, then it would make more sense to attack the smaller cards first and move your way up.

I personally am using the Snowball effect for my credit card debt. I need instant gratification and need to show things getting paid off quickly. I’m much more likely to keep after my debt if I see it shrinking and I can even think about each card getting paid off. Statistics also show that people are far more motivated in paying a debt when they see things being eliminated quicker. It’s really a personal preference and should be evaluated on a personal basis.

But congrats on reaching that first step, it’s definitely the hardest. We’re on this journey together!

Why You Need an Emergency Fund

Do you have an emergency fund? NO? Well never fear, because you’re in good company with lots of other Americans. Studies show that 39% of Americans don’t have enough in an emergency fund to cover a $1000 emergency.

Really? Yep.

$1000 isn’t very much. It’s less than most car repairs this day. Less than what it might cost if your dog got bit by a rattlesnake. And less than a medical emergency.

So why do we need one? Well if that last statement didn’t convince you of it, I don’t know what will. Most of us are living paycheck to paycheck, 1 emergency away from financial disaster.

How much do we need to save? Statistically, we should probably have 3-6 months worth of living expenses. Seem like a lot? Well, it’s not in the grand scheme of things, when you without a job, or living in a crisis.

We’d all like to think that friends and family could help us out in times of need. And truthfully, most would like too and would try. But how many of them just wouldn’t be able to help because they too are living paycheck to paycheck?

Emergency funds are for just that, emergencies. They shouldn’t be used for emergency shopping, or emergency vacationing, or even emergency car repairs.

They are funds that are virtually untouchable unless cases of disaster. We should all have a bank account, savings account, emergency account, and retirement account. It seems like a lot of accounts, right?

Hear me out though. If we delegate and separate our money into their respective accounts, and only use those accounts for what they’re intended for, we can save.

It all starts with a budget. And then planning and delegation. If we’re saving 10% of our check for after expenses for our savings account, then the rest should go to our emergency fund. There is a hierarchy of savings, which some will agree and some will disagree with.

If you have debt, my suggestion is that make sure that you’ve at least 2 months of savings for emergencies put away before you attack your debt. I don’t mean don’t pay the debt, but attacking and making large payments to try to pay it down. I believe it’s more important to have something in savings, even if it’s small before you attack the debt.

Some may disagree and say you should pay your debt down first before you invest in an emergency fund, but that just doesn’t sit well with me. I believe you should always have a little in savings/emergency funds before you worry about paying off the debt.

An even faster approach to getting that emergency fund up and running is to get a part-time job, or side hustle.

What we’re trying to avoid is that when emergency or tragedy strikes, we’re prepared to deal with it. Without reaching for those dreaded high-interest credit cards.

Planning now prevents major stress and headache in the long run. It only makes sense to take some easy and necessary steps to prevent panic when something goes run. Check out How to Start an Emergency Fund to learn some easy, simple steps to start that emergency fund today!