Which Debt Pay Off Method Is Best For You?

 

 

We all know there are millions of ways to get yourself into debt, but there are mainly two ways to get out of debt: the snowball method or the avalanche method.

While they’re both different, at the end of the day, they both help pay off debt. Choosing one is mostly about which approach motivates you to stay on track.

A note: they’re all easy on paper. “Just pay down debts, do the math, and bam! Debt-free!” However, keep in mind, it takes time, a ton of money, and regulating your emotions through the journey to get out of debt, but it’s worth it.

Let’s deep dive into each one so you can figure out which one is best for you.

The avalanche debt payment method

The avalanche debt payment method focused on paying down the debt with the largest interest rate while making minimum payments on all other debts. The goal is to pay as much as you can on the debt that is your focused target before moving on to any of the others.

Once that debt is paid off, you move on to the debt with the second highest interest rate, and so on.

This method has the potential to save you money by eliminating costly interest charges. If your debt is going to take you years to pay off, you might want to choose this one because the debts with the highest interest rates are costing you the most over time.

Let’s go over an example. Let’s say you have four different debts:

  • Credit card #1 with a balance of $500 and an interest rate of 12%
  • Credit card #2 with a balance of $2000 and an interest rate of 25%
  • Car loan with a balance of $13,000 and an interest rate of 7%
  • Student loan with a balance of $12,000 and an interest rate of 5%

With the avalanche method, you’d focus on paying off Credit Card #2 first because the interest rate is 25%.

From there, you’d focus on Credit Card #1, then your car loan, and then your student loan.

Who would be best for using the avalanche method?

This method is a great option for people who are very analytical and love to focus on the math behind paying down debt. Starting with the highest interest rate is the most logical, even if it might have the highest balance.

If you need instant gratification, this method might not be the best one for you. It can take time to pay down high balances, and you might want a “win” sooner.

The snowball method

The snowball method focuses on paying down your smallest debt balance first while paying minimum payments on larger debts. Once your smallest debt is paid off, you’ll move onto your next smallest debt. This method is great to help you build momentum as you pay off debts.

If you want to know, this is the method I used in my debt-free journey.

Yes, this method might cost you more money over time because the higher interest rate credit cards can be costing you more. However, for a lot of people, this is worth it.

Let’s go through the same example as above, but using the snowball method instead.

  • Credit card #1 with a balance of $500 and an interest rate of 12%
  • Credit card #2 with a balance of $2000 and an interest rate of 25%
  • Car loan with a balance of $13,000 and an interest rate of 7%
  • Student loan with a balance of $12,000 and an interest rate of 5%

With the snowball method, you’re going to start with Credit Card #1 because it has the lowest balance and would be a “quick” win. From there, then you would focus on Credit Card #2, student loan, then car loan.

Who would be best for using the snowball method?

People who love quick wins and to see progress. If you make trackers or love to make debt payoff planner spreads, you can imagine how focusing on this method would help.

For myself, I knew if I had to tackle my $100,000+ student loan in the middle of my debt payoff journey would have derailed most of my motivation and progress.

In summary

Overall, getting out of debt is an incredibly emotional journey. Quick wins can be a great step to get you motivated to carry on in your journey. However, the right method is the one that works for you. Keep in mind, you can switch your method, too! You might start with high interest rates but realize you need a quick win.

Above all, the most important thing is getting started.