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So, you’re finally tired of being in debt and you are ready to create a plan to eliminate it all. Awesome!
You created a budget and start browsing the Internet looking for the best method to follow; however, there are thousands of personal finance blogs giving advice on what’s the best method to use.
Now, you’re overwhelmed and you’re ready to give up before you get started.
Before you throw in the towel, I want to help you understand two methods you can choose from to begin tackling your debt today.
The debt snowball method and the debt avalanche method.
You may have come across these two terms before.
They are very similar. The goal of both is to help you become debt-free and they each require one focus debt and ask you to pay just the minimum balance on all the rest.
With either method, you’ll apply every extra penny you come across to the focus debt until it’s paid off. Then, you’ll move on to the next debt in line, repeating the same steps.
As you bring debt accounts down to zero, you’ll eliminate your minimum payment and will have more money to send as additional payments to your next focused debt.
The only major difference between the two is the order in which you pay off your debts.
Remember, personal finance is personal and the direction you choose to take is highly dependent on your personal situation and/or preference.
What is the Debt Snowball?
With the debt snowball method, you’ll pay off your debts starting with the smallest balance down to the largest balance, regardless of interest rates. This method works by:
- First, organizing your debts by its balance from smallest to largest.
- Next, paying the minimum monthly payment on all your debts.
- Then, applying any and every extra dollar you come across to the debt with the smallest balance until it’s paid off.
- Once your smallest debt is paid off, follow steps 1-3, adding the previous monthly minimum payment and any extra money to pay off the debt next in line. Continue until all your debt is gone.
The amount you’re able to apply monthly to pay off your focus debt grows as accounts are zeroed out. Hence the name snowball.
This method is great because you get many small wins up front and you’re able to pay off your smallest accounts quickly.
You’ll see an instant return on your hard work, be able to celebrate these milestones, and have the momentum needed to keep rolling along.
By the time you get to the debt with large balances, you’ll be focused and will have a huge amount to throw at it monthly. Your large debts are now less intimidating, and you know you’ll be able to clear them off because of all the progress you’ve made so far.
What is the Debt Avalanche?
As I mentioned previously, the debt avalanche method is very similar to the debt snowball; however, it’s primary focus is on helping you save money in interest in the process. It does this by prioritizing your debt payoff strategy by the accounts with the highest interest rates. This method works by:
- First, organizing your debts by its interest rate from largest to smallest.
- Next, paying the minimum monthly payment on all your debts.
- Then, putting as much extra money as possible towards the debt with the highest interest rate until that account is paid off.
- Once that account is paid off, move to the debt with the next highest interest rate. Follow steps 1-3 and take the money used to pay off the previous debt to pay towards this one until it’s gone. Repeat until you’re debt-free.
If saving money is your priority and not fast wins, you may benefit from following the avalanche method since you don’t need that momentum to knock out your debt.
Which is the best method to pay off debt?
After reading the explanation of both methods, they both may sound like feasible options. You may now be wondering which method you should follow.
There isn’t a correct answer. It all comes down to your personal preference.
The method you choose depends on your unique situation, goals, and feelings about debt.
If saving money is your main motivator and you have a lot of higher interest debt such as credit cards, the debt avalanche may be the better option for you.
Or if you’re like me and need help with staying motivated and you want to see results quickly, following the debt snowball method would make more sense for you.
Which method did I choose?
Personally, I follow the debt snowball method because I need that motivation. Those quick wins, in the beginning, helped me realized that I could work towards achieving financial freedom.
Unintentionally, I used both methods simultaneously because my debts with the lowest balance also had the highest interest rates.
But, what best for me may not be what’s best for you.
Here’s my advice:
- Weigh your options: If you do the math, you’ll probably see that you’ll pay off all your debt around the same time no matter which approach you take. And, you may realize that won’t even save that much by choosing to pay off the debts with the highest interest rates first.
- Focus: Focus on one account at a time. You’ll make much faster progress and be more likely to stay on track with your debt payoff plan. No matter which method you choose, pay them off one at a time.
- Stay motivated: If you’re noticing your motivation levels are dropping, try switching between the two methods to get an energy boost. The end goal is to get all your debt paid off even if you need to use a combination of both approaches over time.
- Don’t give up: Getting out of debt is hard. It requires a lot of work, determination, and sacrifice, even if you do choose the debt snowball method. Be sure you’re tracking your progress so that you can look back at where you started from and know that it’s all worth it.
Getting out of debt requires much more than picking a debt payoff method. Whichever method you choose, the debt snowball or the debt avalanche, the most important part is that you create a budget and make a plan that you can stick to.
Making the commitment to pay off debt will help you free up cash, achieve your financial goals, and even raise your credit score.
The bottom line is that personal finance is personal, so make sure that you’re always doing what’s best for your situation.
Which method did you follow, or are you currently following, to pay off your debt?