Seriously, even Olaf makes me cringe right now. Just... no more winter please!!!
Yet, here I am bringing up the less than desired shadows of winter on this blog in talking about snowballs and avalanches. Although neither really does relate to the winter season itself and actually has to do with two competing methods of how one should go about paying off debt.
And I found myself in a bit of a quandary as far as it relates to my debt and paying it back.
So last month, as I've related a few times, I did a credit swap between my Mastercard on a promotional 0.99% AIR and my ~5% interest rated student loans. But since I didn't actually manage to wipe out my student loans with the credit swap, while I more or less decreased the overall interest I would pay on my debt, it also meant that I went from servicing one creditor to two again.
What also doesn't help matters is that my promotional AIR one the Mastercard is actually a ticking time bomb, set to go off on April 2016, meaning that if I fail to pay off the full balance by then... I don't know for sure actually. Worst case scenario is I get smacked with my regular 18.99% interest rate on the full balance of the transfer and not just what`s left of it. Either way I have about zero intentions of finding out what happens then.
So what's the problem? Pay off the Mastercard and let that be the end of that. In fact, the snowball method dictates that that's exactly what I'm supposed to do. Wipe out my smallest debt first, celebrate and gloat in my brilliance and success, then tackle the next.
That's what I did back when I started aggressively paying down my debt and that was the plan originally when I had cooked up this crackpot scheme. Minimize down on the student loan payments in order to just toss as much money as I can at the Mastercard in order to make it go away quickly and forget the charges ever existed. Oh and to celebrate when it was gone.
Except... the math doesn't entirely work here.
I've never had a problem picking between snowballing and avalanching when I had more than one debtor simply because my credit card was always the one with the highest interest on it and the least owed to it. So there was never any complications or discussions on which I'm doing. Both resulted in me doing to same thing.
But now my credit card may have become my smallest debt once more, but this time it currently has the lowest interest rate between it and my student loans. Suddenly my process differs, because according to the avalanche method, I should be minimizing out on my credit card and popping every extra dollar to my student loans.
To do otherwise is to pay more in interest than I should on my massive student loan debt in the meanwhile. Even $200 there would make a difference to the interest that accrues daily.
However, I don't think the avalanche method takes into consideration that this 0.99% interest rate has an expiry date and therefore cannot be overlooked as something I can just throw the minimum at while chasing my student loan interest rates down. I risk getting tossed the full sum when April 2016 rolls around, especially if I have no means of throwing down the full amount at the very end. And let's be frank, if I had that amount sitting in my bank account waiting to be deposited, then I'm an idiot because it would have been better to have just tossed it on sooner and not paid the interest in the meantime.
I had about 15 months as of this past February to come up with the $3,000 I needed to pay off the loan on my credit card. If we ignore the interest that would accrue in that time, that means I need to pay down $200 a month in order to pay off that loan on time, a sum that currently I accrue via found money whether it is done through freelancing or by being extra frugal for a month.
That is to say, my credit card payments are not budgeted and generally difficult to plan for. And this makes me a little anxious when it comes to paying just $200 a month on that card because honestly, I can't tell you for certain that I will have that money next month.
However with that said, after this week, I'll have paid off about $525 dollars to my credit card. I'm almost a full month ahead of schedule on that card and it's barely been a month since I made the swap and with money yet to come from these additional ventures.
But still, the uncertainty irks me.
So I decided if one or the other isn't a viable solution for my future planning, I'll just have to do both.
Every month, I need to pay down at least $200 to my credit card, no if, ands or buts. That's my "minimum" monthly payment needed to pay off that loan in the time needed before the regular and exorbitant interest kicks in again.
After that, the extra sums that go above and beyond will end up being split between both creditors. One to service the avalanche method in order to pay the creditor with the highest interest rate and therefore save money long term on it for me, the other to service the snowball by not just accelerating payments on my smallest debt, but also to act as a safety net during months when I may not be able to pay down $200.
Some may say I'm still doing it wrong, and that's fine. But for me, it seemed like the most logical path to take in order to ease my mind on both fronts.
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