Debt Tracker

Introduction

From the staggering $1.78 trillion in federal and private student loan debt to the $11.92 trillion owed on mortgages, the world of loans and debts is a labyrinth that millions navigate daily. But what happens when the labyrinth becomes a trap? What happens when the numbers become too big, the interest rates too high, and the debts too overwhelming?

Consider this: despite a net worth of $150 million, Charlie Sheen reportedly fell $12 million in debt. Or take the case of the once-beloved RadioShack, which filed for Chapter 11 bankruptcy after defaulting on its loan. Even the King of Pop, Michael Jackson, wasn't immune, finding himself in a $400 million debt at one point.

In this article, we will navigate the world of loans and debts to help you manage and overcome your financial challenges. We'll explain popular methods to pay off your debts, like the 'snowball' and the 'avalanche' ones. Throughout, we'll provide real-life examples and spreadsheet templates so you can imagine your finances becoming debt-free.

Debt section

Imagine carrying around the burden of an average of $38,000 in personal debt - a reality for many Americans. Whether student loans, credit card bills, or mortgages, debt is a reality for many. Today, we will focus on two popular methods for debt repayment: the debt snowball and the debt avalanche.

The debt snowball method, as the name suggests, starts small. You focus on paying off your smallest debt first while making minimum payments on the rest. As each debt is paid off, you roll the money you were paying on that debt into the next smallest balance. The psychological boost you get from paying off a debt can be a powerful motivator.

On the other hand, the debt avalanche method takes a more mathematical approach. You start by paying off the debt with the highest interest rate first while making minimum payments on your other debts. This method may take longer to see progress, which can discourage some. However, the Avalanche model is best if you want to pay the least possible amount towards interest payments, as you're tackling the most costly debts first.

How would you tackle these debts? What strategy would work best in your situation? While it might sound straightforward, both strategies demand critical considerations to ensure success. First, do you have sufficient resources to meet the minimum payments of each debt? Secondly, are you fully aware of your outstanding debts and how they stack up over time? Lastly, can you plan and track your repayment journey?

Case study: Charlie Sheen

Now, let's look at the case of Charlie Sheen and explore how he could've, hypothetically, managed his debts by using our debt template. For our scenario, let's say that this debt comprises mortgage payments, personal loans, and a significant amount owed to the IRS. Let's input all this data into the template:

1. Mortgage payments: $4 million in debt at an interest rate of 3.5% and minimum payments of $20,000 per month
2. Personal loans: $1 million at an interest rate of 5% and minimum payments of $5000 per month
3. IRS debt: $7 million at an interest rate of 6% and a minimum payment of $35,000 per month

This template will automatically organize Charlie's debts in the correct order for each payment method - the snowball, avalanche, and even a customizable one, which we'll get into later.

Under the snowball method, Charlie would tackle his debts in order from smallest to largest - personal loans first, followed by the mortgage payments, and finally, the tax debts, which typically bear the highest interest rates.

On the other hand, the avalanche method would change this order: Charlie would begin by addressing the tax debt due to the highest interest, followed by the mortgage payments, and finally, the personal loans.

Now, how do we compare the two methods? As we can see, there are differences in each method's outcome, particularly in the overall interest paid and the date when Charlie would be entirely debt-free.

We can also see a distinction in the dates when Charlie finishes paying off his first debt. With the snowball method, Charlie would clear his first debt sooner, boosting his confidence and reinforcing his commitment to the debt-clearing process.

However, although it takes more time to eliminate the first debt with the avalanche method, the total interest Charlie would pay by the end is significantly less. This method may be more economically beneficial in the long term.

One item we didn't mention earlier – because we didn't want complicate the topic – is honestly identifying your monthly savings. We have two methods for this. First, we ask you to blindly list your income and expenses for each month.

Second, we ask you to enter your bank balance for each of the last six months. From both these methods we calculate your monthly savings and highlight if reality is different from your imagination.

Knowing if you have enough monthly savings to pay off your debts is critical. 40% of Americans have reported having trouble paying their bills. If you fall in this category, your focus should be more on increasing your monthly income rather than pay off debt.

So, which method would you choose? The snowball, with faster payments, versus the avalanche, with smaller amounts. But is it really that black and white? Of course, the snowball and avalanche methods aren't the only ways to tackle debt. Some of you have shared your custom methods that have worked wonders. One such method we've heard about is the 'hybrid method'. This approach involves starting with the snowball method to remove a few small debts and gain momentum. Once you've built up some confidence and freed up some extra cash, you switch to the avalanche method to tackle those higher-interest debts and save on interest over time.

The beauty of this method is that it combines the psychological boost of the snowball method with the financial efficiency of the avalanche method. It's a testament that personal finance is just that - personal. There's no one-size-fits-all solution; a mix of different strategies might work best for you.

Remember, whether you're a snowballer, avalanche, or hybrid, the goal is to get out of debt and stay out of debt. Whichever method you choose, the key is to stick with it, stay disciplined, and keep your eyes on the prize: a debt-free future.