Usually, getting in to debt isn’t done on purpose. It happens bit by bit over time; an unplanned credit card purchase here, a car loan there, and that student loan that’s been hanging around for years. Before you know it, you look up and see a mountain of debt in front of you. Unlike getting in to debt, getting out of debt requires a plan and a method. Here we will compare two popular methods used to pay off debt. Welcome to the showdown: the debt avalanche versus the debt snowball.
Getting out of debt is a lot like running a marathon.
Earlier this year I ran a marathon. It was definitely one of the toughest things I’ve ever done. I read many tips and recommendations online. I compared training methods and decided on one that fit my schedule and personality. Then, I put in the work, enjoyed the rush, and reveled in the feeling of accomplishment when I crossed that finish line.
During the race, I didn’t just start running and eventually cross the finish line. All along the route there were mile markers and encouragements. Community members had lined the course with signs, musical instruments, and smiling faces.
Near the end of the race my body began to fatigue. But just three miles before the finish line, there stood my supportive husband with our two dogs. He cheered me on and told me I was almost there. That gave me the boost to push myself to the end. As I crossed the finish line, I was almost in tears from the pain and happiness. I had achieved one of my largest bucket list goals.
The process of paying off debt is very similar.
Depending on your situation, it can be a long and exhausting journey. You need a plan for a path that marks progress, while offering you encouragement and support.
Let’s take a look at two of the most common paths that people usually take.
The Debt Avalanche
How it Works
In the Debt Avalanche, you list your debts starting with the highest interest rate and work your way down to the lowest interest rate, regardless of the amount owed.
You then pay the minimum payments on all but that debt with the highest interest rate, which you then knock out with every extra penny you can find. Once you knock that debt out, you move down to the next highest interest rate, and so on.
Mathematically, this this the most efficient way to pay off debt. Since you are paying off the debts with the highest interest rates first, less of your money is going toward interest. If you stick with the Debt Avalanche you will have paid less money than any other method.
Personal finance isn’t always about the math. In fact, it is much less about the math and more about the habits, the self-control, and the consistency.
The Debt Avalanche works well if your debts are all similar in size or the ones with the higher interest rates are the smaller debts.
The Debt Avalanche gets really difficult when you have a larger debt with a high interest rate before other debts.
It can be tough to keep motivated when you feel like you aren’t gaining much traction. Imagine trying to pay down a $50,000 debt $100 at a time. This would be similar to running a marathon where it’s all uphill except for the last mile. It would be difficult to stay motivated.
The Debt Snowball
How it Works
In the Debt Snowball, you list your debts in order of dollar amounts, smallest to largest, regardless of the interest rate.
You then pay minimum payments on all but the smallest debt. You attack that smallest debt with everything you have. Once it is paid off, you use the extra money opened up to pay on the next smallest, and so on.
Paying off the smaller debts first gives you the feeling of winning and the motivation to keep on paying down debt.
By the time you get to your larger debts, you have opened up enough of your income to pay larger amounts on them at a time. This makes it seem like you are making more progress.
Imagine paying a $50,000 debt $2000 at a time. If you have to eat the elephant one bite at a time, you may as well take the biggest bites possible.
Technically, it isn’t the most efficient way to pay down debt. You may end up paying a little more on interest since you are paying the debts by dollar amount and not interest rate. But, as I mentioned earlier, personal finance is not all about the numbers.
Personal finance involves people, and people are emotional creatures.
The Debt Snowball does a better job at catering to those emotions.
The act of paying off the smaller debts gives you the sense of winning. It also gives you the encouragement to keep moving forward.
Which Method Should You Use?
If all your debts are around the same amount, then go ahead and work the Debt Avalanche.
In almost all other cases I recommend the Debt Snowball.
Getting to that debt-free destination is the goal. With the Debt Snowball you are more likely to stay on the path. The Debt Snowball just does better at helping people stay motivated in their debt payoff journey.
If you have two debts that are the same amount, still work the debt snowball, but feel free to pay off the one with the higher interest rate first.
No matter the method you choose try to keep yourself motivated. Keep a visual reminder of the debts in a place you’ll see everyday. Display photos or images reminding you of why you want to be debt free.
Celebrate milestones in a responsible way. For each major milestone my husband and I hit we would enjoy a nice dinner out. Do not celebrate your way back in to debt.Stay on the path; it is worth it in the end.