FASTEST WAY TO PAY OFF CREDIT CARDS
Written by Alli
This post is all about the fastest way to pay off your credit cards using our Debt Tornado strategy. If you are confused about what the different strategies are, click our post on the Snowball, the Avalanche, the Tsunami and be introduced to our Tornado.
Scroll to the bottom if you'd rather watch a video.
So now we’re diving deep and showing you exactly how the Tornado works and how it is the fastest way to pay off credit cards.
Guess how much faster you can pay off your debt using the Debt Tornado than using the Debt Snowball?
You can pay off your credit card debts up to 20% faster and up to one year faster with the Debt Tornado method!
So let’s meet Debbie, a fictional character we made up to help explain the concept. She recently joined our Own Your Debt program and has $40,000 dollars in credit card debt spread across 5 different cards all with different balances and different rates.
She’s just like your typical American.
She has 5 different credit cards and they all have different balances on them and they all have different interest rates and the total amount of debt she has is about $40,000 dollars. Her average interest rate is about 21% which is fairly typical, 27% is high for like your travel rewards credit cards, 12% is on the lower end like connected to your bank account normally or something like that. Her minimal payments all add up to be about $1,130 dollars per month, which is a lot, it’s like a mortgage payment.
After she pays for all of her housing and food, all of her needs, she has an another $1200 dollars leftover that’s going to go towards this debt.
As you can see that’s not much more than her minimum payment, really.
Caveat: A lot of people are in this situation where they're really just pressed to the limit as far as what their creditors demand to them for payments and what they can make. Definitely the biggest thing to start with is to try to distance that gap between your income and your expenses so you have more and more money to put towards your debt, it’s going to help you eliminate a lot faster, but we really use Debbie as this example so you can see how the strategy plays out for her.
Debbie came to us not really knowing what to do, she had a lot of questions like: Should she focus on building an emergency fund? A lot of people recommend building $1,000 dollar emergency funds even before you start tackling your credit card debt. She wonders if she should follow the Snowball method and pay off the smallest balance first as that what's a lot of people recommend too, and a lot of people have had success doing that too. She also wonders what she should do if an unexpected expense comes up, if she doesn’t have an emergency fund.
Debbie feels overwhelmed and out of control when it comes to her credit card debt which is absolutely understandable. There are a lot of people in the same place especially if you have $40,000 dollars’ worth of credit card debt and you're paying almost $1200 dollars a month towards your payments. It can seem really overwhelming and really hard to know what to do, where to start, and how to tackle it most efficiently.
So thankfully, Debbie joined our program and she now has a step-by-step guide to tackle her debt. We’re going to show you our recommendations for her so you can get preview of how you can apply our strategies to your personal situation.
So here you can see Debbie’s timeline to debt freedom
She joined the course in November 2018 and that’s when we put this projection together. You can see if she used the Debt Snowball method with a $1,000 emergency fund, she would pay off her debt in November of 2023. If she used the Debt Avalanche method with a $1,000 dollar emergency fund, she would pay off her debt about 3 months earlier, in August of 2023.
Using the Debt Tornado strategy, she would be able to pay off her debt in March of 2023, which is almost 6 months earlier that the debt Avalanche method and 9 months earlier than the Snowball method.
So how much money does Debbie save doing the Debt Tornado method?
Debbie would save almost $8,450 dollars in interest payments by using the Tornado method.
Imagine what you would do with an extra $8,400 or $8,500 dollars sitting in your bank account. You could take a trip to Europe. You could invest it!
You could do a lot of cool stuff!
So, how does this Debt Tornado work? And why does it pay off your credit cards the fastest?
Using the Debt Tornado method, Debbie pays down her debt by highest interest rate first. The Debt Tornado is basically a little tweak on the Debt Avalanche strategy. The biggest tweak is that she does not keep an emergency fund. I know a lot of you are throwing some red flags as you’ve been taught that you need to have to have an emergency fund to keep you out of going back into credit card debt.
But here is the situation: you're already in credit card debt! So by keeping this money in a savings account, you're actually causing yourself to pay more in interest than you would if you put this towards your debt immediately and started tackling that top interest rate debt from day one.
Without an emergency fund, people will ask what happens when we have an unexpected expense. So in Debbie’s case we estimated that she would have $1,000 dollars unexpected expense every 6 months that would account for some of those random unexpected expenses.
What would Debbie do when an unexpected expense came up? Debbie would put that expense on her lowest interest rate credit card.
Why we think that emergency funds are pointless when you have credit card debt
With a $1,000 dollars sitting in a savings account, how much interest are you earning on that money, maybe 1%, 2%?
2% if you’re lucky and are in a high interest rate savings account.
So, you're not earning much money on that $1,000 dollars. But meanwhile, your credit card balance is racking up interest at over 20%.
If you put that $1,000 dollars to work on your credit card debt, you'll be making more money in the long run.
Think of it this way: by putting that money towards your credit cards, you're saving yourself that 20% interest that you're paying on that credit card balance.
So, why do so many people recommend the Snowball method of paying down debt when the Tornado is clearly more advantageous?
That’s because paying down debt is exhausting and you will have unexpected expenses come up that make you feel like you're derailed and off-track and make you want to give up on your debt pay down game.
So, psychologically, if you have that emergency fund it helps people to feel like “okay I'm not derailed, I have this, I've prepared for this, I've planned for this,” which makes sense.
Given that it’s obvious that so many people suffer from paydown fatigue while paying down debt and feel like they're overwhelmed and get off course, how do we at Owen Your Future prevent debt pay down fatigue while following the strategy that makes the most sense mathematically?
A few things: we really stress community, accountability and identifying unconscious money habits.
In the first part of our course or the first thing we do with any coaching clients is it really try to tackle how you relate to money, how you think about money and dig up any past traumas or any past money experiences that can impact you negatively. The community aspect is there to support you and keep you going, keep you motivated, inspired by people sharing their wins, encouraged by people sharing their failures and struggles. It really helps everyone understand that there are other people going through the same thing you are, we are in it together and by working together and supporting each other we can get to the other side.
So if you're ready to Own Your Debt and tackle the Tornado method strategically and with care and confidence, you can schedule a call, talk to us, we’ll see how we can help you best, whether that’s coaching or courses. But just so you know, our free material is always going to be available, so wherever you are at your journey we have something for you.