Two Strategies for Digging Out of Debt

Two Strategies for Digging Out of Debt

08/01/2020   Archive

Carrying debt can weigh heavily on our minds, reduce our freedom of choice, and cost us a ton of money in interest. Assuming you’ve got more than one debt to pay off, which method of debt repayment should you use?


The Snowball Method

The snowball method works like this:

  • Rank your loans from smallest to largest balance.
  • Pay above the minimum on the loan with the smallest balance. Pay the minimum balance on all your other loans.
  • When the smallest debt is paid off, take everything you were putting toward the account and add it to the payment for the loan with the next lowest balance.
  • Repeat the process until you’ve paid all debts.


The Avalanche Method

The avalanche method works like this:

  • Rank your loans from highest to lowest interest rate.
  • Pay above the minimum balance on the loan with the highest interest rate. Pay the minimum balance on all your other loans.
  • When the debt with the highest interest is paid off, take everything you were putting toward the account and add it to the payment for the loan with the next highest interest rate.
  • Repeat the process until you’ve paid all debts.


Which Method Is Best?

As you can see from above, both the snowball and avalanche method are similar in that they have you focus on a particular account while paying the minimum on all others. And when you’ve paid off one account, you redirect whatever money you allocated for it to the next one.

When you do the math, the avalanche method usually will get you out of debt faster. That’s because you reduce the amount of interest you pay on the loan. For this reason, the bulk of money gurus tell people to attack high-interest accounts first.

But here’s the catch. For some individuals, it’s hard to stay motivated to stick to a debt repayment plan because they don’t feel the gratification that comes with being done with accounts. So, in theory, having multiple zero balances to look forward to along the way can make it easier to stick to a debt repayment plan.

Ultimately, the technique you use is your personal decision. Just be honest about your habits and pick the most comfortable strategy for your situation.