Will Velocity Debt Payoff Outshine Volume Debt Repayment

Velocity Debt Payoff vs Volume Debt Repayment: Cutting Through the Noise to Unlock Financial Freedom

The debt repayment debate has become a contentious issue in recent years, with many people caught up in the volume debt repayment myth. The idea that paying off large balances first is always the best strategy has been perpetuated by banks and financial experts alike. However, I’m here to tell you that this approach can actually hinder your progress.

As someone who’s reverse-engineered the debt system and successfully cut their own payoff time in half, I’ve got a different perspective on what really matters: velocity debt. In this post, we’ll dive into the hidden mechanics of debt repayment and explore why velocity debt payoff is often overlooked in favor of volume debt repayment.

Velocity Debt vs Volume Debt

To understand the difference between these two approaches, let’s first define them. Velocity debt refers to the interest rate associated with outstanding debts at any given time. This includes credit card balances, personal loans, and mortgages, among others. On the other hand, volume debt is simply the total amount of debt you carry.

The problem with volume debt repayment is that it doesn’t account for the fact that interest rates decay over time. When you pay off a large balance first, you’re not necessarily paying more in interest – you’re just shaving years off the principal. Meanwhile, if you tackle smaller balances or debts with higher interest rates, you can actually save money on interest payments.

Consider this example: let’s say you have two credit cards with outstanding balances of $5,000 and $3,000, respectively. If one card has an interest rate of 18% and the other 6%, a naive approach might suggest paying off the larger balance first. However, if we calculate the total interest paid over five years, we’ll find that paying off the smaller balance with the higher interest rate saves you $2,500 in interest payments.

The key to unlocking financial freedom lies in understanding how velocity debt works. When you make a payment, the bank uses a portion of it to pay off interest on your existing debts and a portion to apply to the principal. This means that the interest rate associated with each debt changes over time, depending on when the payment was made.

By recognizing this dynamic, we can actually benefit from paying off smaller balances or debts with higher interest rates first. It’s not about paying more in total – it’s about redistributing cash flow in a way that saves you money.

The Power of Cash Flow Redistribution

One of the most powerful tools in your debt repayment arsenal is cash flow redistribution. This involves allocating a fixed percentage of your income towards debt payments, rather than trying to pay off large balances first.

By doing so, you create a consistent stream of funds that can be applied to multiple debts over time. This approach allows you to take advantage of velocity debt and interest rate decay, as I mentioned earlier.

For example, let’s say you have two credit cards with outstanding balances of $5,000 and $3,000, respectively. You allocate 50% of your income towards debt payments. By applying this consistent amount to multiple debts over time, you can actually reduce the principal balance on both cards faster than if you were paying off one large balance first.

The Takeaway

So, will velocity debt payoff outshine volume debt repayment? The answer is a resounding yes. By understanding how velocity debt works and redistributing cash flow in a way that saves you money, you can cut your debt repayment time in half and achieve financial freedom faster.

Don’t fall for the myth of paying off large balances first – it’s a relic of the past. Instead, focus on cutting through the noise and unlocking the hidden mechanics of debt repayment. Your wallet (and your future self) will thank you.