What is the best debt payoff method?
I want to introduce you to one of the largest debates amongst the financial blogger community. It seems like everywhere you turn people are fighting to prove that their debt payoff method is the best. But, whether it’s the debt snowball method, the debt avalanche method, or a combination of the two (snow-valanche method), at the end of the day it’s completely up to you.
The reason people get so passionate debating this is because, depending on your lifestyle, one method tends to work significantly better than the other. But, sometimes you have to try out both in order to see which one fits your personality.
Personal finance is personal and you have to stick to the method that is the easiest to incorporate into your life and is the most sustainable.
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What Is The Snowball Debt Payoff Method?
This is the method that is highly revered by Dave Ramsey. If you are someone who is looking for quick wins and immediate gratification, then this might be the right method for you.
How does it work?
- Organize all of your debts from lowest to highest balance.
- Pay the minimum balance on each debt every month.
- Dedicate extra payments to the lowest balance until it’s completely paid off. Then allocate those payments to the next lowest balance debt.
- Keep repeating until all of your debts are paid off!
Example: Sallie decides to try the snowball method, she organizes her debts from lowest to highest balance below. She will focus on paying Debt A first, then move on to Debt B.
- Debt A- $5k at 12%
- Debt B- $7k at 10%
- Debt C- $12k at 18%
- Debt D- $15k at 5%
This method will allow you to see the light at the end of the tunnel and experience faster progress. But, it’s not necessarily the best method financially.
Read: 10 Ways You Can Reach Your Financial Goals
How Does The Avalanche Debt payoff Method Work?
When you take a look at the actual numbers, the avalanche method is a smarter decision financially. With this method you end up saving more money in the long run (if you can stick to it!). But, this method might also seem more daunting to begin with. If you’re finding yourself dragging your feet and avoiding paying off your debt, then maybe jump back to the snowball method until you gain momentum!
Here’s how it works:
- Organize all of your debts from highest interest rate to lowest interest rate. (Call your banks and lenders to find out your interest rate if you’re unsure!)
- Pay the minimum balance on each debt every month.
- Dedicate extra payments to the debt with the highest interest rate until it’s completely paid off. Then allocate those payments to the debt with the next highest interest rate.
- Keep repeating until all of your debts are paid off!
Chances are, your highest interest rate debt will be your credit card debt. It might even work out in a way that this is your smallest balance too!
Example: Using the same debts as in the snowball example, Sallie now organizes them by from highest to lowest interest rate below. She will focus on paying Debt C first, then move on to Debt A.
- Debt C- $12k at 18%
- Debt A- $5k at 12%
- Debt B- $7k at 10%
- Debt D- $15k at 5%
The reason that this method works to save you money in the long run is that you’ll be paying off the debt that is growing the fastest. The debt that is growing the fastest is the one with the highest interest rate.
In fact, according to Market Watch, if you’re paying the minimum on a $2,000 credit card balance at an annual interest rate of 18%, it would take over 30 years to pay off. That is just insane. The reason it takes so long is your debt is constantly going up and the minimum payments aren’t enough to make a huge dent in it.
What if you find starting with the avalanche method too overwhelming? Is there another approach? Read on to find out about the snow-valanche method!
Read: How To Prioritize Your Finances
What Is The Snow-valanche Method?
If you aren’t ready to commit to one method over the other, why not try both? There is no right or wrong way, you just have to get started!
Here’s how I would combine the two methods so you get the best of both worlds- save money on interest and get quick wins!
How does the snow-valanche method work?
It starts with the snowball method to get some quick wins under your belt and then switches over to the avalanche method.
- Organize all of your debts that are under $5k from lowest to highest balance. Any balance above $5k, organize from highest to lowest interest rate. (This $5k number is arbitrary, I chose it to match the earlier example, feel free to choose a value that makes more sense to you!)
- Pay the minimum balance on each debt every month.
- Dedicate extra payments to the debt with the lowest balance until it’s completely paid off. Then allocate those payments to the debt with the next highest balance.
- Keep repeating until all of your debts under $5k are paid off!
- Next, we will be switching to the Avalanche method! Continue paying the minimum balance on each remaining debt every month.
- Dedicate extra payments to the debt with the highest interest rate until it’s completely paid off. Then allocate those payments to the debt with the next highest interest rate.
- Keep repeating until all of your debts are paid off!
Example: If Sallie decides to try the snow-valanche method, she will focus on paying Debt A first, then move on to Debt C.
- Debt A- $5k at 12%
- Debt C- $12k at 18%
- Debt B- $7k at 10%
- Debt D- $15k at 5%
That is just one way to combine the snowball and avalanche method! You can also simultaneously focus on both the lowest balance & the highest interest rate.
You can do this by making extra payments on the debt with the lowest balance & the highest interest rate debt. In Sallie’s example this would mean she would focus on Debt A and Debt C first.
So, what is the best debt payoff method?
Read: How To Be Recession Proof
Which Is The Superior Debt Payoff Method? The Snowball, Avalanche, or snow-valanche Method?
What I want to stress with the earlier examples is there is no correct way of approaching paying off your debts. As long as you have an organized system that works for you and helps you reach your financial goals then that is the method that’s best for you.
But, if I’m speaking from a purely mathematical approach (I did study engineering…) then I would personally prefer the avalanche method. This is the method that will save you the most money in the long run and could help you reach financial goals faster!
If the avalanche method does not work for you then try the snow-valanche or snowball methods!
Now I’m curious, which method do you prefer?