I’ve read a lot of varying advice over the years on the best way to pay off your debt. There are multiple ways you can tackle your debt, but the most talked-about methods are the snowball and the avalanche/ladder method. So which one is the best to pay off your debt?
With the snowball debt payoff method, you list out all your debts smallest balance to largest and make minimum payments on every one but the one with the smallest balance. For that smallest debt, you throw every additional dollar you can at it until it’s gone. When it’s gone, take its minimum payment and the extra you put toward it, add it to the minimum on the next larger debt, and so on, and so on.
The other way is the avalanche debt payment method. With this one, you list your debts in order of interest rate – largest to smallest. Again, you’ll pay minimums on all of them, but this time you’ll throw everything you can at the one with the largest interest rate. Once it’s gone, you move down to the next highest rate, etc.
So which debt payment method is right for you?
Debt Snowball Pros and Cons
Pro: You get a fast win. If you’ve got a lot of debt to pay off, it’s going to take a while to do it. It can be hard to stay motivated if you’re looking at more than a year to go. By tackling the smallest debt first, you can see progress faster, encouraging you to keep going. This is a good method if you have a lot of smaller debts, as you’ll see them drop quickly. You gain momentum.
Pro: Your cash flow grows quickly. Since you’re knocking off smaller balances, you’re getting rid of minimum payments. With fewer payments, you are less exposed. This gives you more breathing room in your monthly budget if you need it, not to mention it helps reduce your stress.
Con: You can pay more in interest. Interest rates don’t factor in with the debt snowball method – just the total amount owed for each debt. So while it’s possible that you are also tackling higher interest rates first, it’s not a given. It’s likely that you’ll be paying a little more in interest along the way.
Debt Avalanche Pros and Cons
Pro: You pay less in interest. Knocking off the highest interest rate first saves you a little in the long run, but it’s surprisingly not as much as you might think. It all depends on how high your interest rates are.
Con: It can be harder to stay motivated. When it takes longer to pay off your first debt, it can be harder to see the light at the end of the tunnel. Your highest debt could be the highest interest rate, meaning you’re going to pay for a long while before you see it drop off the balance sheet.
So which debt repayment method should you pick?
The answer is, “it depends.”
Don’t call that a cop out! Let me explain – what will keep you moving, and how much do you have to pay off? If you’re going to be at this a while and you have multiple individual debts, you might need to see some smaller ones drop off that list in the first six months, because you know you’re going to be at this for a while. It’s textbook positive reinforcement – you have more money at the end of the month, and you can breathe a little easier. But if you’ve got bigger balances on those high interest debts and there are fewer of them, then the avalanche might make more sense.
We’re following the snowball method to see some earlier wins and help us stick with it. I have juggled one debt from third into second place because it has a higher rate than the one it replaced, so I guess our method is technically a bit of a mix. But the difference between those two amounts isn’t much, so it’s a closer call as to which one has the bigger balance. If we had stayed 100% true to the snowball method, we would get to that debt maybe four months down the line, and spend maybe another $100 in interest. In the grand scheme of things, it’s not going to make much of a difference when we’re looking at the sum of what we have to pay off.
At the end of the day, whichever method you choose, stick with it. Because it’s worth it. As those debts start to drop off and you have more flexibility in your cash flow, the less stressed you’ll be – and the more freedom you’ll have.
Which method are you using?