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's possible to be debt free. So often, debt feels like a lifetime sentence, but it doesn’t have to be.
As you explore the different types of debt pay-off plans, the debate between the debt snowball vs. debt avalanche is bound to come into play. Each side of the debate makes strong points for their favorite debt repayment strategy. But, which is the best debt payoff method? Let’s take a closer look at how these two strategies compare.
The Debt Snowball Method
The debt snowball method is a plan of attacking your debt with the 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. Determine which outstanding loan balance is the smallest and focus on that one first.
When you choose to focus on the smallest balance, you will throw any extra money you have for debt repayment toward that loan each month. As for the rest of your outstanding loans, you can stick to paying the minimum while you aggressively attack the smallest balance.
Once the smallest loan is paid off, you move to the next smallest. When you move on to the next smallest loan, you’ll be able to use any money you have available for debt repayment plus the minimum payment of the loan you just eliminated. With that, your snowball used to tackle your debts will continue to grow.
Advantages Of The Snowball Method
If you have many debts on your books, it can be difficult to know what you should tackle first. The snowball method allows you to focus on one small debt at a time. Instead of feeling overwhelmed by the sheer number of debts that need to be paid off, you can focus on one achievable task at a time.
As you eliminate your smaller debts, you can enjoy the feeling of wiping one debt completely out of your life. The celebratory feeling can provide the motivation you need to keep pushing forward one small debt at a time. Half the battle of paying off debt is the motivation to do so. The snowball method is great if you're looking for an extra boost of motivation.
Disadvantages Of The Snowball Method
The major disadvantage of the snowball method is that you will likely pay more in interest on your debt repayment journey. When you focus on the smallest debts first, you aren’t necessarily using your funds in the most efficient way possible.
Although you'll likely pay more in interest, the motivational push provided by the snowball method could be worth it if you need the small wins along the way.
The Debt Avalanche Method
The other option is the avalanche method, which focuses on the highest interest rate first. When you use the avalanche method, you’ll take a look at all of your outstanding balances to see which has the highest interest rate attached.
You’ll start by paying off the loan with the highest interest rate. From there, you’ll continue to allocate any funds you have available for debt repayment to the next highest interest rate.
Depending on the outstanding loans you have on the books, you might have to start with a large outstanding loan balance. With that, it can take some time to see a big win of eliminating an entire debt. But mathematically, you’ll be on a path to eliminate your debts in the most efficient way possible.
Advantages Of The Avalanche Method
The numbers behind the avalanche method ensure that you won’t pay any more than you absolutely have to as you eliminate your debts. If you follow your plan without fail, you'll pay less in interest and less overall with the debt avalanche. In other words, you'll be on the fastest track to being debt-free.
Disadvantages Of The Avalanche Method
Although the math behind the avalanche method is enticing, it can be difficult to stay the course. Without small wins along the way, you might not have the motivation you need to stick to your new repayment plan.
Debt Snowball vs. Debt Avalanche: Which Is Best?
In personal finance, nearly everyone has an opinion on which debt payoff method is best. But the real question is which method is best for you.
The quick successes of the snowball method often make it a more sustainable choice for people. But if you're a numbers-oriented person, then the progress made with the avalanche method may be a better fit. With the right internal motivation, you may not need the small wins provided by the snowball method to stay the course.
Ultimately, what is best for you is 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.
When it comes to choosing between the debt snowball vs. debt avalanche, do whatever makes sense for you. Regardless of which method you choose, the most important thing is to get started.
It can be easy to get into analysis paralysis and think that you have to repay your debt the “right” way. Do it your way. But most importantly, just do it.
Momentum leads to motivation which often leads to even more momentum. And that's a powerful cycle that can lead to amazing results. With the right debt pay-off plan for you, you’ll be debt-free one day soon!
Sarah Sharkey is a personal finance writer covering credit cards, mortgages and student loans. She has written for numerous finance publications, including MagnifyMoney, Business Insider and ChooseFI. Her blog, Adventurous Adulting, helps young adults get a handle on their finances.
Editor: Clint Proctor