Best Way to Pay Off Debt
The Debt Snowball vs. the Debt Avalanche
Do you have a budget? How about a plan to pay down your debt?
With a good plan for action and the dedication to follow through, you can set yourself up for financial success.
One of the best ways to pay off debt, the “debt snowball” is a popular strategy for good reason. It works!
It’s less known cousin, the “debt avalanche” is another great strategy aimed for long-term financial success.
What is the Debt Snowball?
This aptly named strategy can be useful for paying down debt. The idea comes from a snowball that you might roll down a hill. As it rolls further down the hill, it collects more snow, thus becoming larger.
The debt snowball works in much the same way. The idea is that you put some extra sum of money towards a debt, specifically your lowest-balance debt, say $100.
Meanwhile, you continue paying the minimum balance on your remaining debts.
When you pay off that debt you then use that $100, plus whatever you were paying into it towards the following debt.
What is the Debt Avalanche?
Arguably the best way to pay off debt is using the debt avalanche. The strategy is like the debt snowball, but instead of putting that extra $100 towards your lowest-balance debt first, you pay your highest interest-bearing debt first.
Similarly, you would continue paying the minimum balance towards your other debts.
Once you pay off the debt with the highest interest rate, you would then put all that money towards the debt with the next highest interest rate.
How do you get started?
Make a list of all your debts. Everything should be listed, including any credit card balances, house mortgages, car loans, student loan, or anything you are currently paying that has some remaining balance.
Make a list something like this:
|
Name |
Total balance |
Monthly minimum payment |
Interest rate |
|
Credit card |
$11,621.20 |
$125 |
29.99% |
|
Private Student Loan |
$19,861.00 |
$250 |
7.9% |
|
Car Loan |
$9,056.77 |
$350 |
4.9% |
|
Federal Student Loan |
$5,915.18 |
$100 |
6.9% |
|
House Loan |
$159,278.29 |
$1,250 |
4.0% |
Feel free to download a template here: Best Way to Pay Off Debt Template.
Now that you’ve made your list, analyze your debts critically. Which ones have the highest balance? The lowest balance? Which ones have the highest interest rate? Make note of these beside each debt.
Which Strategy is the Best Way to Pay Off Debt?
Both the debt snowball and debt avalanche are great strategies. Which one is better, you might wonder? The answer to that question depends on your goals.
You may decide to follow the debt avalanche and pay off debt with the highest interest rates first. This is a great idea if your main goal is long-term profitability and financial success. This way you can get rid of the worst offending money-suckers first.
The debt snowball is a good way to build momentum towards your goal of paying off debt, especially if you’re just getting started. After all, it’s very satisfying to pay off one of those costly debts. Better yet, once you pay off one debt, you can use that money to pay off the next debt and so on!
The best way to pay off debt will ultimately be up to your financial goals. Pick the avalanche if you’re strictly focused on keeping more money in your pocket in the long-term. Pick the snowball if you think you’ll need the motivation to keep going.
You may also consider following a hybrid strategy. Maybe you start with the lowest balance to build momentum, but then you put money into the highest interest rate debt next. I personally prefer this option because you get the best of both worlds.
Strategy 1: The Debt Snowball
Following the first strategy, you might do something like this for the example above, assuming you have $100 extra per month to put into your debt:
- Pay $200/month ($100 minimum + $100) towards federal student loan until balance is gone. Pay minimum balance for everything else.
- Put $550/month ($350 minimum + $200 from prior debt) towards car loan until balance is gone.
- Pay $675/month ($125 minimum + $550 from prior debts) towards credit card until balance is gone.
- Put $925/month ($250 minimum + $675 from prior debts) towards private student loan until balance is gone.
- Finish by putting $2,175/month ($1,250 minimum + $925 from prior debts) towards house loan.
Strategy 2: The Debt Avalanche
Following the second strategy, you might decide to do the following:
- Pay $225/month ($125 minimum + $100) towards credit card until balance is gone. Pay minimum balance for everything else.
- Put $475/month ($250 minimum + $225 from prior debt) towards private student loan until balance is gone.
- Put $575/month ($100 minimum + $475 from prior debts) towards federal student loan until balance is gone.
- Pay $925/month ($350 minimum + $575 from prior debts) towards car loan until debt is paid off.
- Lastly, put $2,175/month ($1,250 minimum + $925 from prior debts) towards house loan.
What about a hybrid strategy?
Using a hybrid strategy, you might consider putting extra money into the federal student loan balance first, because it has the lower balance. After this is paid off, you might decide to tackle the higher interest rates balances next and go after the credit card debt.
Paying off debts with higher interest rates first will help you keep more money in your pocket. However, paying off a lower balance debt may keep you more motivated and may also give you more peace of mind. Choose the strategy that best meets your needs!
What are your financial goals and how might the snowball or avalanche strategy contribute to them?
Thanks for reading! Do you have any lingering questions? If so, let me know in the comments below or send me a note on the contact page. I’d love to join you on your journey to financial success, whatever that means to you!
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