Is it Snowing or Is It an Avalance? Planning to Pay Off Non-Deductible Debt

Getting out of debt. It’s a dream for many, no matter what kind of debt you might have. I’m focusing today on the first part of the second tier of financial freedom – making a plan to pay off “non-deductible” debt.

The Financial Pyramid will help you reach financial freedom
The Financial Pyramid will help you reach financial freedom

What’s “non-deductible” debt again? It’s the worst kind of debt-the kind where you can’t deduct any of the interest payments like you can with student loans or mortgages. It sucks up your cash flow and income, forcing you to keep running as hard as you can just to stay in place financially. It keeps you from going higher toward financial freedom and your dreams, because you instead have to put money toward it every month. It includes:

  • Car loans
  • Personal loans – from a website, family, or friend
  • Credit cards
  • Other kinds of loans – Furniture loans, $0 down $0 a month purchases (aka no/no/no plans), rent to own, payday loans, etc.

Today I’ll talk through some of the scary statistics around debt, making your plan, choosing between behavioral and mathematical payoff methods, and share my story around debt payoff.

The Statistics Are Scary

If you’re currently debt free (and if so, congratulations!) you may not know just how much debt is currently outstanding for the people around you. The data is scary. Consider the following statistics:



Making Your Plan

The reason getting to know your balance sheet (or net worth) is the foundation to financial freedom is because it makes you face exactly how much debt you have. Maybe you were pleasantly surprised at the outcome – or horrified and you never want to look at the total amount again.

Look at the total amount you owe, and then look at your cash flow statement for the past month. What are your monthly payments on that debt? What other dreams could you be pursuing if you didn’t need to feed the debt monster a chunk of your income every month? Even at a low interest rate or at zero percent, I’m sure you have plenty of things you’d rather being doing with that money than using it to pay off old debts.

After looking at your total, and the amount you use every month to feed that debt monster, think about your dreams. How much time do you want to pass before you can put those monthly payment to work toward your dreams and toward financial freedom? One year? Two? You probably don’t want five or ten years to go by before you start working toward your dreams. Pick what you think is a challenging – but not impossible – goal.

Remember, you don’t have to pay the same amount every month. You can (and will!) make lump sum payments along the way from extra income, bonuses, refunds, and other unexpected income. You’ll also experience emergencies, unexpected expenses, and other things that might make your payment lower in a particular month. Life happens. We’ll prepare for it with an emergency plan and not let it derail us in our goal of freedom. But first you have to choose which method to use to payoff your debt – the one behavioral science shows is most successful, or the cold hard math method.

Behavior vs. Math (Or Debt Snowball vs. Debt Avalanche)

You’ve probably heard of the debt snowball, and you may already know about the debt avalanche. Different financial experts will recommend you use their method, and only their method – insisting it’s the right one. The problem is they’ll all recommend different things. So what are people striving to reach financial freedom supposed to do?

There’s no one right answer – there’s only what’s right for you, in your situation. So you’ll want to look into both of them and think about what will motivate you to keep going. The important part isn’t to pick the optimal method. It’s to pick the one that will keep you going when it gets tough to shovel extra money toward the debt. And if you try one, and it doesn’t work – try the other one. Just don’t give up.

Debt Snowball Debt Avalanche
What it is Behavioral approach Mathematical approach
How You Do It Make a list of your debts from smallest to largest dollar amount.

Throw all extra money at the smallest debt until it’s paid off fully.

Then take all that money (the extra you were paying and the payment for the small loan) and put it toward the next biggest debt.

Keep going until you’re debt free!

Make a list of your debts from largest interest rate to smallest interest rate.

Throw all extra money at the one with the largest interest rate until it’s paid off.

Then take that payment and apply it toward the next biggest interest rate.

Keep going until you’re debt free!

Pros You’ll be more likely to stick with the plan because you can see “quick wins”, and get the motivation from getting rid of a debt more frequently. You’ll save the most money over the long term this way
Cons You’ll pay more money over the long term this way It may be harder to stay motivated over the long term if your highest interest rate debt is very large and will take a long time to pay off

After you pick your method you’ll need to see what it’s going to take to reach your stretch goal timeline to become debt free. Here are some excellent calculators to get you started:

My Story With Debt

Today I’m totally debt free except for my mortgage, which I plan to have paid off in five years. But it wasn’t always this way. Back in 2012 when my husband almost died of septic shock, we had some “normal” debt – accumulated some more dealing with the aftermath (student loans from finishing my MBA). I had a few years left on a car loan, we were in a cycle of using credit cards for everything and paying them off every month (but some months we struggled), and I had to drain all my savings to pay for medical expenses and other expenses that go with a catastrophic medical event. You’d be surprised just how many “other” kinds of costs come up that aren’t strictly medical-hospital parking, new clothes, special food, railings for stairs, daycare, etc. Not to mention income loss, time off work, and many other things.

I went into “stormcloud mode”, cutting every expense and stopping all savings (except for enough to the 401k to still get the match). After life started to stabilize, I became determined to get out of debt entirely. I didn’t like those student loans hanging over my head, taunting me with their threat of capitalizing interest once I was done with the MBA. I hated sending hundreds of dollars every month to the car loan. I was sick of the cycle of using the credit card, paying it off, and using it again. I wanted to be totally debt free.

So I kept expenses at bare bones and threw everything extra at those debts. In less than a year they were totally gone. We used the checking account for all expenses, keeping the credit card only for online purchases or large purchases where we needed the protections of the card (and having enough in savings to pay it immediately). After doing that I was able to resume saving for college, max out my 401k, and am now focused on getting rid of the last, biggest debt-the mortgage.

So if you’re in debt – I’ve been there. I’ve been through some of the worst things life can throw at you, and I’m still here striving toward financial freedom. You can do it too!

I want to know – what’s your debt story? Let me know in the comments.

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8 thoughts on “Is it Snowing or Is It an Avalance? Planning to Pay Off Non-Deductible Debt”

  1. Luckily, we’ve steered clear of significant debt. We had minimal student loan debt that we paid off within a year or two of graduating. We did succumb to car loans for a few cars, but I’m happy to say that our last three cars were all paid in cash. So our mortgage is our last debt, and if all goes according to plan, that should be wiped out by April 2021.

    We do use our credit cards quite a bit, but we pay them off every month. The primary reason for using the cards is to get the cash back and points. We easily get over $1,000 per year from this and I can’t remember the last time we every paid interest on a credit card.

    Regarding the snowball vs. avalanche, being an engineer I totally understand the avalanche approach. That said, I’m also a believer in behavioral economics, so I can see the benefits of the snowball approach. For folks that are in serious debt, I would think that the snowball approach would be preferred since they will start seeing ‘wins’ sooner.

    1. I think it also depends how many you have. If you have a few large debts, the avalanche might work fine. But if you have one big one and a lot of little ones, then you’ll see a lot more quick wins using the snowball

  2. Thank you for the article!
    I have to say that having a family means no excuse but to keep a savings buffer as Ramsey suggests. My partner and I have just thrown our tax returns at catching up because -life- happens seemingly every other month. I enjoy seeing a balance in savings every once in a while, but it’s that short-lived.
    I’m going to be writing a follow up blog and sharing some numbers. I welcome any helpful insight!
    Snowballs and Avalanches –

    1. Yep, life definitely happens every single month! That’s why rather than budgeting every dollar, I have a “life” buffer in my budget to account for all those things that come up that you can’t plan for/forget about. Birthdays, car registration renewals, kids activity fees, oil changes, etc. Then as the month goes on the buffer money gets re-categorized correctly into the right place, so at the end of the month there’s nothing there. Looking forward to your post!

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