Paying off debt is no easy task, but it will help bring financial freedom. There are two distinct methods to pay off debt: the debt avalanche method and the debt snowball method. While both are useful strategies to get debt out of your life, one method might be easier for you to stick with and make a bigger impact on your debt repayment. Here’s how to find out which debt repayment method is best for you.
Both methods require that you list out your debts and make minimum payments on all but one debt. This is where the methods vary. In the debt avalanche method, you pay extra money toward the one debt with the highest interest rate. With the debt snowball method, you pay down the smallest debt first and work your way up, regardless of the interest rate.
- The debt avalanche method involves making minimum payments on all debt, then using any remaining money to pay off the debt with the highest interest rate.
- The debt snowball method involves making minimum payments on all debt, then paying off the smallest debts first to get them out of the way before moving on to bigger ones.
- The debt avalanche method can often result in lower payments over time.
- The debt snowball method can be valuable for maintaining energy and dedication while paying off debt.
The debt avalanche method involves making minimum payments on all debt, then using any remaining money to pay off the debt with the highest interest rate. Using the debt avalanche to pay off debt will save you the most money in interest payments. For example, if you have $3,000 extra to devote to debt repayment each month, then the debt avalanche method will make your money go the furthest. Imagine that you have the following debts:
• $10,000 credit card debt at 18.99%
• $9,000 car loan at 3.00%
• $15,000 student loan at 4.50%
In this scenario, the avalanche method would have you pay off your credit card debt first, then allow you to pay off your remaining debt in 11 months, paying a total of $1,011.60 in interest. The snowball method would have you tackle the car loan first, becoming debt-free in 11 months, but you would have paid $1,514.97 in interest.
Just by switching the order of your debts, you can save hundreds of dollars in interest payments. For individuals with larger amounts of debt, the avalanche method can also reduce the time it takes to pay off the debt by a few months.
If the debt avalanche method is the best strategy to save money and time, then why have another debt repayment choice? The advantage of the debt snowball is that it helps build motivation for debt repayment. The debt snowball method involves paying off the smallest debts first to get them out of the way before moving on to bigger ones.
It's not easy to get excited about debt repayment. Throwing large payments at your debt is even harder if you don’t see quick progress, and you could be prone to throw in the towel. “The math seems to lean more toward paying the highest interest debts first," says financial expert Dave Ramsey. "But what I have learned is that personal finance is 20% head knowledge and 80% behavior. You need some quick wins in order to stay pumped enough to get out of debt completely.”
With the debt snowball method, you see instant progress and will be able to pay off a debt completely in only a few months. The debt avalanche will not work as effectively if you lose motivation and skip a month or two of strategic repayments.
The Bottom Line
If you are serious about tackling your debt, then pick which method is best for your own situation and personality. The best method is the one you can stick to. If you are a person that needs more motivation to pay off debt, then stick with the debt snowball method.
You can also use a combination of the two methods. In the example above, the best move may be to tackle the credit card debt first and then pay off the car loan next, rather than the student loan.
Both debt repayment plans are useful and can help you regain financial freedom. Use specialized debt repayment calculators to discover when you will pay off your debt and how much interest you will pay.