Most people get into debt at some point in their lives — whether through student loans, credit cards, or car loans. Of course, the goal should be to pay off this debt so you can focus on improving your financial stability through successful investing and eliminating some of the fears surrounding money you might be harboring.
However, if you have multiple debts — and don’t have the liquidity to pay them off at once in full — which one should you pay first? There are two main strategies recommended to get out of debt: the debt avalanche method and the debt snowball method. This article will explain what they are and which one might be right for your situation.
What is the debt avalanche method?
The avalanche approach to debt repayment involves making the minimum payment required on every debt you owe, every month. Any remaining money for your debt repayments then goes toward the debt with the highest interest rate. As soon as you pay off this debt in full, you then allocate that monthly extra to the next highest-interest debt. You continue the cycle until all debts are paid off.
An example of the debt avalanche method
An example can help clarify how the debt avalanche method works. Let’s say you have three debts you’re working to pay off: a student loan, an auto loan, and a credit card. Each one has a distinct balance, an annual percentage rate of interest, and a monthly minimum due. Here’s a breakdown:
- The student loan has a balance of $30,000, an APR of 5.95%, and a monthly payment of $550.
- The auto loan has a balance of $10,000, an APR of 3.99%, and a monthly payment of $400.
- The credit card has a balance of $8,000, an APR of 14%, and a monthly payment of $200.
Let’s say you have $350 in extra money remaining for debt payments every month. In this case, you’d put that $350 toward the credit card balance. Once that first debt is paid off, you can tackle the student loan — the debt with the next highest interest rate.
Pros and cons of the debt avalanche method
Understanding the advantages and disadvantages of the debt avalanche method can help you determine if it’s right for you. Here are some of the pros:
- Saves money: By tackling debts with the highest interest charges first, the debt avalanche method allows you to save money long term. You can knock out high-interest debts before they grow too unwieldy.
- Efficient: The debt avalanche method can also shorten the total amount of time it takes to pay off all of your debts. By addressing high-interest loans first and paying them down as quickly as possible, you keep debt from growing, which means it’s paid more quickly.
That said, there are also drawbacks. These include:
- Requires discipline: It takes significant commitment to successfully implement the debt avalanche method. Also, you aren’t guaranteed the more immediate gratification that comes with the debt snowball method, which allows you to check your smallest debt off your to-do list first (more below).
- No quick wins: Targeting high-interest debts instead of your smallest debts means you might be chipping away at one single debt for an extended period. This can get disheartening compared to the quick win you get when paying off the smallest debt first.
What is the debt snowball method?
While the avalanche method focuses on targeting the debt with the highest interest rate, the snowball method targets the debt with the smallest balance. Following this method, you likewise make the minimum payment required on every debt you owe, every month. However, any remaining money for your debt repayments then goes toward the smallest debt you have (instead of the one with the lowest interest rate).
The logic is that you’ll be able to knock this debt out more quickly than the others, gaining momentum (and motivation!) as you progressively pay off your debts. Once you pay off one debt in full, you then move on to the next debt with the lowest balance. Note that a mortgage (if you have one) is excluded from this approach.
An example of the debt snowball method
Again, let’s say you have three debts you’re working to pay off: a personal loan and two different credit card debts. Each one has its own balance, APR, and minimum monthly payment due. Since interest rates aren’t a factor with the debt snowball method, we’ll just focus on the debt balance and minimum due. Here’s an overview:
- The personal loan has a balance of $10,000 and a monthly payment of $250.
- Credit card No. 1 has a balance of $5,000 and a monthly payment of $60.
- Credit card No. 2 has a balance of $12,000 and a monthly payment of $170.
Let’s say you have $320 remaining to go toward debts every month. Following the snowball method, you would put that $320 toward credit card No. 1, which has the smallest balance. Once that’s paid off, you’d move on to the next smallest debt, the personal loan.
Pros and cons of the debt snowball method
The snowball method has its own set of pros and cons to consider when determining which debt repayment method is right for you. The advantages include:
- Motivational: Multiple different debts can be overwhelming. Whittling down your list of IOUs efficiently can bring great peace of mind. As you pay off your smallest debt first, you’re also more motivated to tackle the next one.
- Simple: The snowball method is super easy to implement. You don’t have to look at APRs or track how they’re changing (in the case of variable rates). You can simply look at each debt’s balance and structure your payments accordingly.
- Confidence-boosting: Debt can be extremely overwhelming. Knowing you’ve successfully paid off one debt can give you greater confidence. When it comes to smart money management, this is generally a plus.
Meanwhile, disadvantages of the debt snowball method include:
- More expensive over time: When you focus on debt balances instead of interest rates, you run the risk of high-interest debts growing. So, you may end up paying more over time.
- Inefficient: Ultimately, the snowball method may mean you’ll need more time to pay off all of your debts. This can happen if you have larger debts with high interest rates, which will continue to accrue interest and grow while you focus on repaying smaller debts.
What is the main difference between the debt avalanche method versus the debt snowball method?
The debt avalanche and snowball methods both require you to pay off the minimum monthly payment on all of your debts every month. Where they differ is which debt you should focus on paying after those minimums are met. The debt avalanche method requires paying off the debt with the highest interest rate, while the debt snowball method requires paying off the debt with the smallest balance.
Which method should you use?
So, which debt repayment strategy is best? You might be surprised to learn that there is no one right answer. Mathematically, the debt avalanche method might seem superior since it can save you money on interest and improves the odds that you’ll become debt-free sooner.
However, successfully paying back all the lenders you owe isn’t just about having the cash — it’s also a psychological game. That’s where the snowball strategy has a distinct advantage. By allowing you to cross off your smallest debt quickly, this debt reduction strategy allows for quick wins, which can be hugely motivating and can give you the boost you need to continue to pursue your payoff strategy.
Paying down debt is largely about psychology. In fact, smart money management as a whole is about psychology. For example, take budgeting. If you feel you’re always restricting your lifestyle because of a budget, the odds are you’ll end up breaking it. A life of constantly saying “no” simply isn’t sustainable for most of us.
However, if you follow a conscious spending plan instead — allowing yourself to spend guilt-free on your favorite pleasures — you’re more likely to stick to it. Successful money management is largely about understanding your money dials — the things you’re really excited to spend money on — and allowing yourself to spend on those without guilt.
Likewise, choosing a repayment plan is a matter of understanding your own psyche. If you have the diligence to pursue the avalanche method, give it a try. If it’s a challenge, you can switch to the snowball debt payoff method. The bottom line is that either strategy will get you closer to debt relief and improve your credit score. There are also other ways you can take down debt, such as via debt consolidation.
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