Velocity Banking is a strategy used to pay off debt really really fast, hence the name velocity. In essence, it is the strategy of paying off your debt in large principal chunks every “x” number of months. For example, you put $5,000 extra towards principal now, then don’t pay any extra principal until you save up $5,000 again. That is the simple explanation of Velocity Banking, but it involves more than just that.
Debt Snowball is the process of paying off your smallest debt’s first before paying extra principle on the largest debt. This strategy does not care about interest rates. It only cares about the human psychology of seeing progress. When you get rid of your smallest debt, you can take the difference and apply it as extra principle towards your next largest debt until that is paid off, then continue the process with the next largest debt.
Debt Avalanche is the process of paying off your highest interest rate debt first and your lowest interest rate last. This typically means you are paying off credit cards first, followed by student loans, then car loans, then mortgages. This process works in a similar fashion to debt snowball. Once you finish paying off your high interest rate student loan, keep making the same payment as an extra principal payment towards your next highest interest car loan, for example.
If you are unfamiliar with Velocity Banking, checkout the Velocity Banking Menu on my website.
To learn more about Debt Snowball, check out my post on Debt Snowball.
Notable Factors
Debt Snowball and Debt Avalanche are an either-or option. You don’t use both at the same time. Snowball is focused on small to large debt and Avalanche is focused on high to low interest. Sometimes that lines up perfectly. Higher balance loans typically have lower interest rates than low balance loans or lines of credit. You can also use debt snowball or debt avalanche in conjunction with velocity banking.
THE FASTEST WAY TO PAY OFF DEBT IS TO COMBINE VELOCITY BANKING WITH DEBT SNOWBALL. THE CHEAPEST WAY TO PAY OFF DEBT IS TO COMBINE VELOCITY BANKING WITH DEBT AVALANCHE.
The Velocity Banking strategy does not promote paying off one debt over the other. That is your decision to make and every person will have a different preference. If you want to pay off debt as fast as possible, combine velocity banking with debt snowball. If you want to save as much as you can on interest, combine velocity banking with debt avalanche.
The Proof Is In The Sauce
We will assume your household income is $5,000 per month. Of that, you have approximately $2,000 leftover each month to pay your loans and credit cards. All of your debt will start at time zero to make the calculations easier. That means you can assume you just got all of this debt now, at the same time.
For the following examples of each strategy, we will use these five debts totaling at least $1,754 per month:
- 21% credit card with a balance of $3,000, minimum payment $60
- 8%, 10 Year Student Loan with a balance of $8,000, minimum payment $97
- 8%, 10 Year Student Loan with a balance of $20,000, minimum payment $242
- 5%, 5 year Car Loan with a balance of $16,000, minimum payment $301
- 3%, 30 year Mortgage with a balance of $250,000, minimum payment $1054
We will compare the following strategies:
- Debt Snowball
- Debt Avalanche
Debt Snowball
With Debt Snowball, you would be tackling the smallest debt first and work your way up to the largest. Every month, you have to make minimum payments totaling $1754. If you are leftover with $2,000 after paying your other everyday expenses (food, utilities, savings, etc), you will have an extra $246 per month. Instead of putting that $246 in savings, you should pay extra principal towards your lowest balance debt, the credit card. That means you will be paying $306 per month towards your credit card even though the minimum payment is $60. Once the credit card is paid off, you will be putting an extra $306 towards the next highest balance, the $8,000 student loan. Including the $97 minimum payment, you are paying $403 per month towards your student loan. After that student loan is paid off, you can focus on the $16,000 car loan, where you will be paying an extra $403 in principal over the $301 minimum payment. Next is the $20,000 student loan before you tackle the $250,000 mortgage.
Using my Loan Amortization Spreadsheet available in My Shop. I was able to calculate the following:
| Debt | Time Paid Off | Interest |
|---|---|---|
| 21% Credit Card, $3000 Balance | Month 11 | $328 |
| 8%, 10yr Student Loan, $8,000 Balance | Month 31 | $1,061 |
| 5%, 5yr Car Loan, $16,000 Balance | Month 42 | $1,816 |
| 8%, 10yr Student Loan, $20,000 Balance | Month 59 | $5,786 |
| 3%, 30yr Mortgage, $250,000 Balance | Month 190 | $73,600 |
| TOTALS | 15.8 years | $82,591 |
In the debt snowball scenario, it will take you 19 years to pay off all of your debt. In total you would spend about $82,600 in interest. This does not take income growth into consideration.
Debt Avalanche
| Debt | Time | Interest |
|---|---|---|
| 21% Credit Card, $3000 Balance | Month 11 | $328 |
| 8%, 10yr Student Loan, $20,000 Balance | Month 50 | $4,027 |
| 8%, 10yr Student Loan, $8,000 Balance | Month 59 | $2,445 |
| 5%, 5yr Car Loan, $16,000 Balance | Month 60 | $2,116 |
| 3%, 30yr Mortgage, $250,000 Balance | Month 191 | $73,965 |
| TOTALS | 15.9 years | $82,516 |
The Results
Debt Snowball & Debt Avalanche will yield very similar results. The numbers were so close using my examples that I had to calculate everything twice to double check the numbers. The Avalanche will take slightly longer and save you slightly more money, but the Snowball will have you finish paying off your debt sooner. By the time your Debt Avalanche gets to Month 50 where the second debt is paid off, your Debt Snowball already paid off three debts and is working on the fourth. The Debt Avalanche example also let the 5 year car payment finish without adding any extra principal. That is because it took 5 years to pay off the credit card and student loans.
How Will Velocity Banking Speed Things Up?
In our example, we have a household income of $5,000 and we have $246 leftover each month after loan payments, savings and regular expenses. That $246 will NOT be the same amount leftover each month. You may spend less on food or utilities in one month, or you may spend less on discretionary spending. Maybe you will switch to a lower cost insurance, cell phone plan, or internet plan. You may cancel your gym membership and Netflix subscription. With an income of $5,000 per month, your leftover amount will likely range from $0 to $1,000. Velocity Banking will automatically take whatever you have leftover at the end of each month and apply it towards your loan.
I took out a mortgage for $282,000 on January 2019, then I started Velocity Banking my mortgage in 2020. I have already paid off $115,000 and am on track of paying off my mortgage by 2026. That is a total of 7 years and over $200,000 savings in interest payments.
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