When you first start paying off debt, the most important thing is to have a plan. Without a plan, paying off debt can seem like a daunting task, which will quickly deflate any motivation you have to, you know, actually pay off debt.
Having a plan can help you realize that debt is not forever, and that it is possible to be debt free. So often, debt feels like a lifetime sentence, but it doesn’t have to be.
So, what is the best debt payoff method? Let’s look at our options:
The snowball method, which is revered by personal finance guru Dave Ramsey, focuses on your smallest balance first. So if you have credit cards, student loans and a car loan, the first step would be to list out all of your remaining balances. Which one is the smallest? Focus on that one first. The point is to pay the minimum on the rest of the loans, while you aggressively attack the smallest balances. After that one is paid off, you move to the next smallest, and so on and so forth.
The theory behind this methodology is that it allows for quick wins, which can help motivate you on your path to debt freedom. Half the battle of paying off debt is the motivation to do so, so this method is great if you are looking for an extra boost of motivation.
The cons? You are likely to pay more in interest over time using this method.
On the other side of the spectrum, you have the avalanche method, which focuses on the highest interest rate first. I personally use the avalanche method, as my balance on my high interest debt is much larger, effectively stealing a few hundred dollars from me each month. In comparison, my undergraduate loan has a smaller balance and bearable interest rate of 2.3%. What I like about the avalanche method is that I am mathematically making a difference in my debt — and I can see that my interest payments are getting lower. Yes, I don’t necessarily get the quick wins feeling of the snowball method, but I know that I am wasting less money on interest, which is very important to me.
The avalanche method will have you paying less money over the life of your loan and focuses on the mathematical principles of paying off debt, rather than the psychological ones.
So, What is Best?
In personal finance, nearly everyone has an opinion on what debt payoff method is best — yet, it’s largely swayed towards the snowball method. And I get it, too. It makes sense. However, I personally believe in the benefits of the avalanche method.
But ultimately, what I think is best for you isn’t necessarily one of these two options. I think it’s whatever helps you sleep best at night. That may sound weird, but debt can do a number on your money mindset, your motivation, and your self-esteem. It’s okay to change things up a bit. You can create a hybrid method of paying off some small balances, then focusing on bigger payments. You can save a bunch of money and then make one lump payment.
Do what makes sense for you, but whatever you do, the most important thing is to get started. It can be easy to get into analysis paralysis and thinking that you have to choose a plan and feel threatened by doing things the “right” way. Do it your way, but just do it.
Momentum leads to motivation and can keep you going, so one day you too will be debt free — and I can’t wait to see you there!
What method do you use to pay off debt?
Melanie Lockert is a freelance wordsmith, a passionate debt fighter, and frugal lovin’ minimalist who writes at DearDebt.com. She devotes 50% of her income to student loan debt and is often dreaming of her next adventure.