When it comes to debt, it’s important to understand the different methods of paying it off. Debt can cause a lot of stress but having a plan of attack will help you throughout the process. 

So how exactly can you pay your debt off?

There are two main ways to pay off debt: the debt avalanche method and the debt snowball method. Both of these will help you become debt-free but the process will be different. 

Things in Common

Let’s start with what both of these have in common. Both of these methods will entail you listing every single debt you have and making the minimum payment on every debt every month. The other thing the two methods have in common is that both will require you to pick one balance and pay it off more aggressively than the others. 

Here are where the differences come in: 

Debt Avalanche requires you to pay extra toward the one balance with the highest interest rate. Debt Snowball requires you pay extra toward the one with the smallest balance first regardless of the interest rate.

Debt Avalanche

The Debt Avalanche method will require that you make the minimum payments on all debt you have, but then put any extra money you have toward the one balance with the highest interest rate. This method will result in you saving the most money on interest. If you want your hard-earned money to go towards paying off more of the actual debt and less interest, this is the method you should follow. 

When going with the debt avalanche, list out all your debts and interest rates on each. Identify the one with the highest interest rate being charged and plan to put every dollar you possibly can toward that one balance every month. Don’t forget to still make sure you are paying the minimum payment on all other balances on time. 

Debt Snowball

When going with the Debt Snowball method, you will also list all your debts but instead of basing your decision on which to pay first on the interest rate, you will base it off the balance. The one with the smallest balance is the one you will work towards paying off more every month. Again, you’ll pay every dollar you can towards this balance while still making the minimum payments on the rest. 

This method may result in you paying more money in interest every month if the small balance you’re working towards is not the highest interest debt you have. Why would you ever choose this method then? It may help motivate you by seeing progress sooner. Paying off debt isn’t usually something people are excited about. It’s quite the opposite and often weighs you down so sometimes you need a quick win to see progress and feel like your hard work is moving you towards reaching your financial goals.

Which method is best?

The decision to pick one of these methods over the other will be personal and different for you than it may be for someone else. If you’re looking at it strictly from a financial perspective, the method that makes the most sense is the avalanche because you’re saving money on interest by paying the higher interest debt first. 

This doesn’t mean the snowball method is not a good choice. While the avalanche is good money-wise, the snowball is effective from a motivational standpoint. The idea is that if you pay one balance off it will motivate you to keep going and pay off the next one. The faster you pay one debt off, the faster you’ll feel your hard work paying off and it will (hopefully) push you to keep going for the next one. 

If you’re someone that needs more motivation, then the snowball method may be better for you! If you don’t need the quick gratification, then you may want to go with the avalanche method to help save some money as you work through your debt-free journey. 

In conclusion…

  • Whether you choose to go with Debt Avalanche or Debt Snowball, you will need to face all of your debt and make a detailed list of each balance you have
  • Debt Avalanche will result in you paying the highest interest rate debt first
  • Debt Snowball will first focus on the smaller balance 
  • Each method can be effective and only you can decide which will make the most sense or cents for you. 😉 

Nothing on this blog should be considered personal actionable advice, research, or an invitation to buy or sell any securities. Consider all risks before investing, including the loss of your hard-earned money. Vee is an Investment Advisor for Warren Street Wealth Advisors, this blog reflects her personal views and not that of Warren Street.