Debt sucks! Especially when you feel like it’s holding you back. From student loans to credit cards, auto loans, and mortgages, debt weighs on more than just our wallets. If you are carrying different types of debt, all with different balances and interest rates, developing a plan to pay it off can be confusing. There is no “one size fits all” approach, but two simple methods can at least provide some structure to your plan:
- Debt Snowball – for those with low motivation and similar interest rates
- Debt Avalanche – for disciplined borrowers with high interest rates
We will look at how each one works, their pros and cons, and help you decide which one is best for you based on your current circumstances.
How to Prepare to Conquer Your Debt
Most days, I leave the house without checking the weather. The weather doesn’t change much where I live, but I always regret not being prepared for it on the days when it rains.
Similarly, preparing before you start an accelerated debt payment plan is the best way to go. Generally speaking, all you need to do is have some form of cushion. For me, that was $3,000. For you, that could be more or less depending on where you live and what your monthly expenses look like.
This cushion will help you weather any unexpected expense or emergency that may have forced you right back into debt if you didn’t have it. If you want to leave debt behind for good, we believe having at least a small amount of cash in savings is necessary.
Debt Snowball Method
If you ever made a snowman growing up, this method will be easy to visualize. First, you take a little bit of snow, pack it into a ball, and then keep rolling it while it continues to grow. Given some consistent effort and time, that little snowball turns into a large snow boulder. First made popular by radio show host Dave Ramsey, the debt snowball method is the go-to debt reduction strategy for many. This method is best for those who have little motivation and will feel inspired by early victories.
While this method will ultimately cost you more in interest, it may be the solution to kickstarting your motivation. After all, if you conquer your debt and pay a little more in interest, you’ll still be better off than if you stopped paying down debt because you lost motivation.
How It Works
The steps for this method are quite simple:
- List all debts from smallest to largest.
- Make the minimum payment on all but the smallest debt.
- Pay as much as possible on the smallest debt until it is paid in full.
- Wash, rinse, and repeat until all your debts are paid!
Let’s say you have three different debts. Using the Snowball Method, you’d rank them from smallest to largest based on the balance as we’ve done below. Then you make minimum payments to all your debts and focus all extra on the smallest until it’s completely paid off. Then you repeat with the next smallest debt.
- Car Loan – $3,000 | 3.6% Interest Rate
- Credit Card Debt – $5,000 | 21.1% Interest Rate
- Student Loans – $20,000 | 4.2% Interest Rate
Snowball Method Pros and Cons
The Snowball method really shines in the early stages of debt payoff. Every time you pay off a debt in full, the early victories make you feel like you’re gaining ground quickly. It also helps build up your motivation when you see the amount you are paying toward your loans continue to increase. Both these factors will encourage you to keep up the consistent effort required to pay off your debt once and for all!
Another small benefit you may notice is a faster bump in your credit score. Since you will be closing debt accounts sooner rather than later, the number of open credits you have will decrease. This will sometimes improve your credit score.
On the other hand, the Snowball method completely ignores interest rates, which could end up costing you. In our example above, the high interest on the credit card debt will cost you a good chunk of change while you focus on the car loan.
Debt Avalanche Method
The Avalanche method ranks debt for you to pay off in the order that will get you debt-free the fastest. This method will also cost you less in interest along the way as well! This method will be best for those already motivated with high levels of discipline.
How It Works
The steps for the debt avalanche plan are equally simple:
- List all debts from highest to lowest interest rate.
- Make the minimum payment on all but the highest interest debt.
- Pay as much as possible on the highest interest debt until it is paid in full.
- Wash, rinse, and repeat until all your debts are paid!
Let’s say you have the same three debts as above. This time we’ll order them by interest rate instead of balance. You make the minimum payment on all debts and focus your extra cash on the largest interest rate possible. Once paid off, you start paying extra on the next one in line.
- Credit Card Debt – $5,000 | 21.1% Interest Rate
- Student Loans – $20,000 | 4.2% Interest Rate
- Car Loan – $3,000 | 3.6% Interest Rate
Pros and Cons
The Avalanche method will show its worth when you are done paying off your debt. Depending on your interest rates and how large the balance is on your loans, you could pay significantly less interest. The other benefit is that you will end up paying your debt off sooner since you will accrue less in interest.
Where the Avalanche method falls short is its ability to motivate you to keep going in the early stages. If your highest interest loan is your biggest balance, it could be years before you pay off your first debt. Postponing a milestone like that can be tough for many.
Which Method is for You?
So, which method is for you? That really depends on your unique situation. Every situation is different, and we don’t believe in a “one size fits all” approach.
If you struggle with motivation, give the Snowball method a try. If you have one debt with a really high-interest rate and you’re feeling disciplined, give the Avalanche method a go. You can always change up your strategy midway if one or the other isn’t working out for you!
No matter what you choose, as long as you continue to prioritize eliminating debt, in time, you’ll get there.
