A Step by Step Guide to Paying off All Your Debts | Ben LeFort | Skillshare

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A Step by Step Guide to Paying off All Your Debts

teacher avatar Ben LeFort, personal finance & writing online

Watch this class and thousands more

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Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

6 Lessons (18m)
    • 1. Introduction and Class Project

      1:29
    • 2. The Snowball Method

      5:02
    • 3. The Avalanche Method

      3:24
    • 4. Which Method Should I Choose?

      1:22
    • 5. How to Use the Debt Repayment Calculator

      5:50
    • 6. Wrap up and Review

      1:11
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About This Class

You will learn about the two most popular strategies for paying off debt.

  1. The Snowball Method
  2. The Avalanche Method

You will learn how each works and the pros and cons of each.

Then you will use the debt repayment calculator I have built for you in the excel worksheet provided in the resources tab to receive your custom debt repayment plan. The calculator will crunch all the numbers for you and tell you how much you need to pay on each of your debts every month to be debt-free in the timeframe you want.

If you are watching this class on a mobile device, you will need to download the excel worksheet from a desktop/laptop as it is not available on mobile devices.

You will need to know some basic information about each of your debts to use the calculator.

  • The balance on each of your debts.
  • The interest rate on each of your debts.
  • The minimum payments of each of your debts.

This information can be found on your monthly statement for each debt or by calling the company you owe money to and asking them for this information. If you enter bad data into the calculator, you will get a bad result so make sure you have those monthly statements with you.

Also if Excel prompts you to do so, click "enable editing" and "enable macros" on the excel worksheet. Otherwise, the calculator may not run properly. 

Meet Your Teacher

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Ben LeFort

personal finance & writing online

Teacher

Hi Everyone, 

My name is Ben and joined Skillshare to teach two subjects that I've been passionate about for years.

Personal finance Turning online writing into a scalable business

I invite you to check out all of my classes on these subjects and let me know if there is a subject that you think I should teach a class on that I currently am not. 

Cheers,

Ben 

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Transcripts

1. Introduction and Class Project: Hi everybody. My name is Ben L4 to I'm going to be your instructor for this class, where we are going to cover the two main methods to get out of debt. And by the end of this class, you will be able to build your debt prey of repayment plan. So what we're gonna do is we're gonna start off by learning difference between the snowball and the avalanche method to debt repayment, which are the two most popular strategies for paying off debt. I'm going to explain how each of these methods work and the advantages and drawbacks of each method. Then you are going to use the custom build debt repayment calculator I've constructed for you. Where basically you're going to enter in as a basic information about your get. Your gonna say when you want to be debt free. And the calculator is going to calculate for you how much you need to pay towards each of your loans and debts each month to make that goal a reality. So the class project is going to be for you to construct your debt free repayment plan. If you are comfortable sharing, feel free to take a screen grab of your calculation using the Excel workbook, which is in the Resources tab below. Take a screenshot of her comfortable and shared in the class project section and get in there and have some discussions with other folks who were paying off their debts because we're all in this together and if we can encourage each other is going to be all the better. So let's jump into it where our first lesson is going to be discussing the Snowball Method to debt repayment. 2. The Snowball Method: Let's start with the Snowball Method, which is where you pay your debts off in order of the balance. So whichever loan or debt you have the has the smallest outstanding balance, that is the first loan you're gonna pay off. Then you're going to pay off the loan with the second smallest balance and work your way up until you reach the loan with the highest balance. The reason for this is because as you are paying off your debts with the smallest balance that allows you to completely clear off and close. And a loan or a credit card very quickly. And if you have multiple credit card debts, the psychological benefit of being able to just clear off that loan really quickly allows you to have the confidence to keep going. So let's get into how the snowball method works step-by-step. Step one, again, you're going to list your debts from the smallest to largest balance. Step two is you're going to make the minimum payments on all of your debts except the loan with the smallest balance. So what you're going to need to do is grab a statement for your each of your debts, whether it be a credit card statement or the statement of your car loan or or whatever loan or gets you half on that statement. It is going to tell you the outstanding balance on that debt, the interest rate you're paying on that outstanding balance, as well as the minimum monthly payment for each of your debts. So that's where you're going to figure out what the minimum payment is on all of those other loans. Because even though we're focusing on the loan with the smallest balanced First, you still need to make your minimum payments at lease on all of your other debts. Otherwise, you're gonna get a ding your credit, and you're going to be exposed to penalties and interest, that's really going to hurt you. So, you know, you're, you're focusing on the loan with the smallest balanced, but make sure you know what your minimum payment, Sarah. And make sure you're making your minimum payments on all of your debts every single month. And to do that, you're going to want to look at the monthly statement, your most recent monthly statement, or simply call up your credit card or loan company and ask them what is the minimum monthly payment? Step three. So you're going to pay as much as possible on that debt with the smallest balance. So if you had a credit card, say they had a few $100 on it and you had other loans that have tens of thousands. You're gonna keep making those minimum payments on the other loans. But you're going to every other available penny that you can spare towards their debt. You're going to put on that loan with the smallest balance. Once you pay off that loan with the smallest balance, you're going to take the payments that you were putting onto that that initial loan. And once it's cleared, you're going to apply that to the loan with the second smallest balance. And you're gonna keep maintaining your minimum payments on all of your other loans that are leftover and focusing on that debt with the second smallest balance. And then you're just going to keep doing that on, right, until all of your debts are paid off. So if you have seven or eight different types of loans and debt bitter outstanding, you're going to keep paying them off in order of balance, starting with the smallest and ending with the largest balanced. That is how the snowball method works in a nutshell. So let's go through a quick example. Let's say you had a home equity line of credit with $50 thousand balance on it, a payday loan with an $1800 balance, two credit cards, one with 3901 with $285 on it, and a car loan of $20 thousand. How would we go about paying off this debt using the snowball method? The first step, again, would be to list your debts from the smallest to the largest balance. And in this example, listed out credit card 1 $285 balance, the payday loan, $1800 balance, second credit card, $3,900 balance, the car loan, and then the home equity line of credit. So we're starting with the smallest and ending with the largest. Step two, again, you're gonna make the minimum payment for that payday loan, the second credit card, that car loan in a home equity line of credit, we're maintaining the minimum payments on each of these loans. And the third step is to focus on all your available cash that's leftover on paying off credit card one which had the smallest balance with $285. And then step forwards, you're going to just repeat that until you are debt free. So then you would move on to the loan with the second smallest balanced key, making the minimum payments on the other loans and focus on paying off that, that new smallest balance so that you're paying off different accounts and clearing them very quickly. And that is a psychological boots to the snowball method will give you, you get to see that credit card with $285 balance goes down to 0 very quickly and you can close out that credit card and focus on the next loan. 3. The Avalanche Method: Now let's discuss the avalanche method to debt repayment. If the snowball method is all about psychological wins, the avalanche method is all about the cold hard numbers and facts. So much like the Snowball Method, the avalanche method is a four step process. The first is to list all of your debts, but this time we're doing it from the highest interest rate to the lowest interest rate. So this time we're listening on our debt starting with the, with the loan or, or debt with the highest interest rate. And again, you're going to find that information on your monthly statement for your credit card or other loans. And again, if you can't find it, call your credit card company or the company you have your loan width and ask for that information. The information you'll need again, the balance on each debt, the interest rate, and the minimum payment on each debt. But now we're going to list all of our debts out in order from the highest interest rate to the lowest interest rate. Step two, we're gonna make the minimum payments on all of the debt except the loan with the highest interest rate. Again, we're focusing on that loan first because we want to clear the debt with the highest interest rate burst the minimize the amount of total interests that we pay. Step three, pay as much as possible on the loan with the highest interest rate and tried to pay that off in full as quickly as possible. Then step four, you know, repeat that process until your debt is paid in full. So let's go through another example using the similar example from the snowball method. This time we have the same loans, but instead of focusing on the balance of each loan, we're going to focus on the interest rate. So the home equity line of credit had a 5% interest rate. The payday loan twenty-five percent. The two credit cards had 17.99, 19% rates, and the car loan had a 9% rate. So how would we pay these off? What order would we pay these off using the avalanche method. So first thing, we would start with the payday loan, then on the first credit curd and the second credit card, a car loan and ending with the home equity line of credit, which is fairly different than what we did with the Snowball Method, which had different balances. But now we're focusing on interest rates. So step two then we're going to make the minimum payments on the two credit cards, the car loan him home equity line of credit. And you're going to focus everything you have on paying off that payday loan, which had the highest interest rate. And step three is focusing on paying off that payday loan because it had the highest interest rates. So any available cache you have to throw out the, at your desk, you're going to focus on the payday loan, making sure you're making the minimum payments on your other gets. Step four. Again, you're just going to repeat that process until all your debt is paid in full. Once a payday loan is paid off, then we're gonna do the same process we did with the payday loan, except for width credit card one, because it had the second highest interest rate. And that means it has the highest remaining interest rate. So you're going to keep doing that, rinse and repeat until you are debt free. The major benefit of why the avalanche method works is that it does minimize the amount of interest you pay by paying off the debt with the highest interest rate. First, you're going to minimize the amount of interest you're paying over the total time it takes for you to clear all of your debts. 4. Which Method Should I Choose?: So a lot of you might be wondering right now, which method is the best one should I choose a snowball method or the avalanche method, which is better? And the answer is really that neither of these are technically better than the other. I mean, if you want to be really technical about it, the avalanche method is mathematically more efficient, meaning you will pay less interests over the time you're paying off your debt because you're starting with the highest interest rate loans first. But the most important thing is that you choose whichever method you can stick with. It doesn't matter which one is technically more efficient. In most cases, it's not a massive impact. But if the snowball method will help you select the psychological wins and stick with it to the end, then that's the right one for you. If you're the type of person who doesn't need a whole lot of motivation. And you're just looking for the mathematically most efficient way to pay off debt than maybe the avalanche method is, is the right one for you. By the end of the day, the most important things, you pick one of these methods and stick with it. Don't change halfway through. Make a plan, and stick with it. So in the next lesson we are going to get into using the debt repayment calculator. And you are going to figure out how much you will need to pay on each of your loans to be dead pre and the timeframe that you would like to have all of your debts cleared. 5. How to Use the Debt Repayment Calculator: All right, so we're going to open up the Excel workbook in the resources section of this class, the debt repayment Excel workbook that I've created for you first have is just a goal-setting tab. You can enter your current age. The big thing here, you're going to want to enter in cell C2 and make sure you enter your goal for how many years you would like to be debt free, because the calculator is going to spit out a different number depending if you said you wanted to be debt free in one year or if you want to be debt free in ten years, it's gonna take you a very different amount of money every month to clear your Gets In one year versus ten years. For example. I'm going to say that in this example I would like to be debt free in five years. So make sure you fill that out then you're going to go into the mind debts tab. And that's going to give you your chance to lay out all of the information we covered about your gets. So I'm going to use the same debts in the examples with the snowball and avalanche methods we discussed with the same balances and interest rates. So home equity line of credit, the payday loan, the two credit cards and a car loan. And these are the same balances and interest rates we use in the examples of how to use the snowball and avalanche methods. So under payment, you're going to enter what is your minimum payment on each of those loans? And you can also enter which company that you have those loans through. So it's going to tally up here your total debt in this example, we have total debt of nearly $76 thousand and total minimum monthly payments of $813. Don't worry about these cells here yet. That's gonna get calculated for you when you go to the next tab, after you've entered all of your information about your debt, this debt repayment calculator. So the first thing you want to choose is the strategy here. You can choose either the highest interest rate first, which is the avalanche method, or you can choose the snowball method. I'll show you how to calculate or works for each method. So I'm going to choose snowball. And then I'll just go over here and click this button here that says calculate your monthly rate. That's going to tell you how much you need to pay on each of your loans every month. So I'm gonna click that. And it's thinking, and it is calculating for me it's already listed out all of the loans from the mind gets tabs. So whatever you enter into the my debts tab gets displayed here. And this column here is going to tell you how many months it will take for you to pay off each loan in the 60 months or five years that we set out for ourselves and the goal-setting taps. So I said I wanted to be debt free in five years. So by the time I pay off the last loan, which is the home equity line of credit, that'll be 60 months away. It's going to also tell me the total interests that I paid on each of those loans over that five-year period. And it's gonna tell me when I will be paid off, what month and year i will be paid off for each loan. So I'll be paid off. I entered this in September of 2020. So by September of 2025, the home equity line of credit will be the last loan that's paid off. It tells me down here in cell D 16, the total amount of interests that I will pay over that five years is $11,417. Now if you scroll down, this is very useful. This fellow's us a payment schedule for each of the loan. So based on the density you interest rates in the balances of each MY debts entered here, and my goal of wanting them all paid off in five years. This is going to tell me how much I need to pay on each loan in each month to accomplish that goal of being d'etre in five years. So if you enter it, if I wanted to be debt free and ten years, this would look very different. That's why it's so important to choose the right goal in the goal setting tab and you can always go back and adjust set. So we can see here after a month one, the credit card is paid off because it has such a small balance. And then after a few months, the payday loan is paid off and then the second credit card. And it shows you month by month when each loan is eliminated and how much to pay on each loan once each loan gets eliminated. So by the end of it, 60 months, it'll show me my six month schedule, just 5-years of how much it would take. So it is telling me that I need to contribute a total of $1463 per month to accomplish that goal. So that is up here. Your monthly payment on all your debts combined is $1463 per month. And now that is a lot of money, but that will be very different. So let's say I wanted to be debt free in eight years instead of five years, we just go back to the calculator and it will recalculate based off of my less aggressive goal. So if I were to take an additional three years to pay off all my debts, that would shave about $400 per month off of my monthly payments. If I wanted to have it all paid off in two years, then it's going to be even more aggressive. So it's going to require even more money paid on each loan over that time. And still thinking so if I wanted to pay it off in 24 months, that is going to charge me nearly 3500.3363 per month. So whether you want to use the avalanche or the snowball method, it will tell you all these factors, how much entropy on each loan, how much you're gonna pay any interest. But the biggest factor you need to control is making sure you're entering in the right information here on the my debts tab. And you're going to want to get that monthly statement for each of your debts to make sure you're doing that and setting a realistic goal in your goal-setting tab. And then the debt repayment calculator will do the rest of the numbers for you. 6. Wrap up and Review: So that is it we've covered how to snowball method works. We've covered how the avalanche method works. You've used the debt repayment calculator to come up with your debt pre-plan. And I told you how much exactly you need to pay on each of your gets every single month to be debt free and the timeframe that you set out for yourself. Now, a lot of people are going to be pretty intimidated by the numbers that they see on paper, how much it's going to take to actually pay that debt off. And that is why I'm, I'm really want you guys to take that screen grab of your number or just simply go into the class projects section and talk to other students who are going through the same thing because a lot of people are gonna be intimidated by their number. So encourage each other. Check out other classes I have here on skill share. If you're looking to sharpen up your other personal finance skills and free up some of the cache you might need to pay off these debts. If you have questions, concerns, leave that discussion, leave a comment and ask me questions directly. I'd be happy to get in there and mix it up with you guys. But I hope you found value in this class. Thank you so much for sticking with it, and I will talk to you again next then.