The Math Behind Velocity vs Volume: How to Optimize Your Debt Payoff

When it comes to paying off debt, most of us are fed a one-size-fits-all approach by our banks and financial advisors. But I’m here to tell you that’s just not true. The truth is, there’s a mathematically precise way to pay off your debt faster, and it all starts with understanding the difference between velocity and volume.

Velocity refers to the rate at which you’re making payments, while volume refers to the total amount of money coming in each month. Think of it like this: imagine you have two cars – one that’s getting a decent 20% return on investment (ROI), and another that’s getting a mediocre 5% ROI. Which car do you want to keep accelerating?

The key is to focus on increasing your velocity, not just pumping more money into the system. That means paying off high-interest debt as quickly as possible, while still making enough room in your cash flow for the essentials.

One way to boost your velocity is by using a technique called “debt snowflaking.” This involves applying small, consistent payments towards your debt whenever you get paid – even if it’s just $20 or $50. The idea is that these tiny payments add up over time, and can help you pay off your debt faster.

But what really matters here is the rate at which those payments accrue. When you’re paying more than the minimum payment on a credit card, you’re essentially creating a snowball effect – where the amount of interest you owe decreases exponentially. That’s because when you’re paying more than the minimum, you’re reducing the principal balance, and that reduces the amount of interest you owe.

Now, some of you might be thinking “but what about my savings? How can I prioritize debt repayment over building up my emergency fund?” The answer is simple: by prioritizing your most expensive debts first. That means targeting high-interest credit cards or personal loans before moving on to lower-interest debts like mortgages or student loans.

Another technique that’s worth mentioning is called “rate decay.” This refers to the way interest rates work – they decrease over time, which means you’ll pay less in interest over the life of your loan. To take advantage of rate decay, try to pay off high-interest debt as quickly as possible, while still making regular payments on lower-interest debts.

Finally, it’s worth noting that cash flow redistribution is key here. That means redistributing any extra money towards your debt, rather than just throwing it into a savings account or investing it in the stock market. When you’re prioritizing your debt repayment above all else, you can create a virtuous cycle where your payments accelerate over time.

In my own experience, cutting through the noise and optimizing my debt payoff has saved me thousands of dollars in interest and hundreds of hours of stress. By focusing on velocity rather than volume, I’ve been able to pay off my debts faster and free up more money for the things that truly matter.

So next time you’re dealing with your finances, don’t just sit there feeling helpless – take control of your debt repayment. Focus on increasing your velocity, not just pumping more money into the system. With a little bit of math and some clever strategies, you can cut through the red tape and start paying off your debts faster than ever before.