I’m sure if you’ve done any digging into paying off debt, you’ve run across the two most common methods of paying off debt – the Debt Snowball and the Debt Avalanche. Likewise, I’m sure you’ve seen advice from quite a few money management gurus telling you why one or the other is the better choice.
The Truth?
They’re both the best choice – it just depends on you.
The Debt Snowball
The Debt Snowball method starts by having you list out each loan and make minimum payments on all of them except the smallest. The smallest loan is the one you will tackle with a vengeance. All of your extra money will go towards that debt. If the minimum payment on the smallest loan is $50, but you have an extra $200 leftover at the end of each month, you will put $250 towards that smallest loan.
Once that loan is paid off, you will add that freed up $250 to your next biggest loan and so on and so forth until every loan is paid off.
Why Does This Work?
The Debt Snowball works because it plays into our emotional side. Humans attach emotions to money and therefore will put more effort into something if they see results. It’s that simple! The motivation behind paying off debt is that you’re actively seeing an improvement. If you tackle those small loans first, you get a “win” sooner than you would if you tackled the biggest loans.
If you’re someone that likes to cross things off your list, that likes to hit milestones, and that savors smaller but more frequent wins, this is the best path for you to take. The Debt Snowball method will keep you motivated and you’ll be far less likely to get derailed if you are seeing results.
The Debt Avalanche
The Debt Avalanche method is very similar, but instead of listing your debts smallest to largest, you will list them by interest rate. The debts with the highest interest rates (yes – they tend to be credit cards) get paid off first, and each time you pay off a loan you add that freed up money to the next loan.
For example, if you have a $10,000 with a 2% interest rate, a $20,000 with a 12% interest rate, and a $50,000 loan with a 6% interest rate, you will pay off the $20,000, then the $50,000, then the $10,000 loan. It does not matter which balance is highest, what type of loan it is, or what your minimum payment is.
Just like the Debt Snowball, you will make minimum payments on every loan except the one with the highest rate.
Why Does This Work?
The Debt Avalanche works because it has the potential to save you a lot of money in the long run! Every loan with a high interest rate will accrue interest faster than a loan with a low interest rate. By tackling the highest rate first, you are saving yourself money in interest that you do not have to pay back later.
This method works best for the person that is driven to payoff debt as quickly as possible without accruing even more in the meantime. If you already have strong external motivations, it will be easier to stick to this method even though those wins aren’t happening as frequently.
So Which One is Right For You?
Here’s where you need to ask yourself – and BE HONEST – are you likely to stick to a debt repayment plan long term? Or do you need a little psychological boost every so often to encourage you to stick to it? Both answers are correct! Whichever plan you choose, know that you are on your way to financial freedom!
If you’d like more info about which plan is right for you, check out this debt calculator and start creating your personal repayment plan!