Debt Management

Example 1: Avalanche vs snowball comparison

Given: Three debts with $500/month available for extra payments (above minimums):

• Credit card: $5,000 balance, 22% APR, $100 minimum
• Student loan: $12,000 balance, 6% APR, $200 minimum
• Personal loan: $3,000 balance, 15% APR, $75 minimum

Calculate: Order of payoff, total months, and total interest for each strategy (month-by-month simulation; see scripts/debt_management.py). Solution — Avalanche (highest rate first: 22% → 15% → 6%):

1. Pay minimums on all ($375/mo). Extra $500 goes to credit card ($600/mo total to CC).
2. Credit card ($5K at 22%, $600/mo): paid off in month 10, ~$476 interest.
3. Freed payment rolls to the personal loan ($75 + $600 = $675/mo to PL): paid off in month 14, ~$408 interest.
4. All payments roll to the student loan ($200 + $675 = $875/mo): paid off in month 26, ~$1,062 interest (the 6% loan accrues interest on its full $12K balance throughout the earlier phases, not just at the end).
5. Total: 26 months, ~$1,946 total interest.

Solution — Snowball (smallest balance first: $3K → $5K → $12K):

1. Extra $500 goes to personal loan ($575/mo total to PL).
2. Personal loan ($3K at 15%, $575/mo): paid off in month 6, ~$123 interest.
3. Freed payment rolls to the credit card ($100 + $575 = $675/mo): paid off in month 14, ~$911 interest.
4. All payments roll to the student loan: paid off in month 26, ~$1,071 interest.
5. Total: 26 months, ~$2,104 total interest.

Comparison: Avalanche saves ~$158 in interest; both finish in 26 months. The difference is modest because the highest-rate debt is not the largest. Snowball gives a quicker first win (month 6 vs month 10 to first payoff) — for many people that motivational difference is worth $158.

Example 2: Refinance breakeven

Given: Current mortgage: $300K remaining, 6.5%, 25 years left, payment $2,028/mo. New offer: 5.5%, 25 years, closing costs $6,000, payment $1,838/mo. Calculate: Breakeven period and total interest savings. Solution:

1. Monthly savings: $2,028 - $1,838 = $190/month.
2. Breakeven: $6,000 / $190 = 31.6 months ≈ 32 months (2 years 8 months).
3. If staying in the home beyond 32 months, refinancing saves money.
4. Total payments (old): 25 × 12 × $2,028 = $608,400 → total interest = $608,400 - $300,000 = $308,400.
5. Total payments (new): 25 × 12 × $1,838 + $6,000 = $557,400 → total interest = $557,400 - $300,000 = $257,400.
6. Total interest savings: $308,400 - $257,400 = $51,000.

Common Pitfalls

• Ignoring psychological factors — snowball works better for many people despite costing slightly more in interest
• Not including all closing costs in refinancing analysis (origination fees, appraisal, title insurance, points)
• Consolidation at a lower rate but longer term may cost more in total interest — always compare total cost
• Paying off low-rate debt instead of investing (opportunity cost) without considering risk tolerance and guaranteed vs uncertain returns
• Not considering tax deductibility of mortgage or student loan interest when comparing effective rates
• Making only minimum payments on high-interest debt while saving in low-yield accounts
• Consolidation freeing up credit lines that lead to new debt accumulation
• Ignoring the amortization reset: refinancing to a new 30-year term extends the payoff date

Cross-References

• lending (wealth-management plugin): mortgage analysis, loan terms, and amortization calculations
• emergency-fund (wealth-management plugin): adequate emergency fund prevents taking on new high-interest debt during crises
• savings-goals (wealth-management plugin): debt payoff competes with savings goals for cash flow allocation
• tax-efficiency (wealth-management plugin): tax deductibility of certain debt interest affects optimal payoff order
• liquidity-management (wealth-management plugin): debt payments are fixed obligations in cash flow planning
• financial-planning-workflow (advisory-practice plugin): debt payoff strategies are evaluated during the cash flow and recommendation phases of financial planning
• insurance-planning (wealth-management plugin): outstanding debt balances are a direct input to life insurance needs analysis

Running the Script

uv run scripts/debt_management.py            # run the demo (uses PEP 723 inline deps)
uv run scripts/debt_management.py --verify   # check demo outputs against the worked examples (exit 1 on mismatch)
python3 scripts/debt_management.py            # alternative (requires: pip install numpy)

The demo prints the calculations covered above; its values match the worked examples in this skill. Run --help for a list of the classes and functions. For programmatic use, import the module rather than running it — the demo only executes under python debt_management.py.