Facing down multiple debts can feel absolutely overwhelming. Between hefty monthly payments and high interest rates, it’s no wonder many people feel paralyzed when it comes to getting their finances under control. Fortunately, there are two well-established methods that can help you systematically pay off your debts: the debt avalanche and the debt snowball. But how do you decide which approach is right for your unique situation?
The debt avalanche method
The debt avalanche method focuses on paying off your debts in order of highest interest rate to lowest. This makes the most mathematical sense, as you’ll save the most money on interest charges over time.
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Make the minimum payments on all your debts.
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Put any extra money you have towards the debt with the highest interest rate.
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Once that debt is paid off, roll the amount you were paying on it to the debt with the next highest interest rate.
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Repeat until all debts are paid off.
The main benefit of the debt avalanche is that it saves you the most money in the long run by targeting the most expensive debt first. This can be especially helpful if you have one or two debts with significantly higher interest rates than the others. Knocking those out first can make a big dent in the total amount you owe.
The debt snowball method
The debt snowball method, on the other hand, focuses on paying off your debts in order of smallest balance to largest. The idea is that getting “wins” by paying off smaller debts quickly can provide much-needed motivation to keep going.
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Make the minimum payments on all your debts.
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Put any extra money you have towards the debt with the smallest balance.
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Once that debt is paid off, roll the amount you were paying on it to the debt with the next smallest balance.
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Repeat until all debts are paid off.
The main benefit of the debt snowball is the psychological boost you get from crossing debts off your list one by one. This can be incredibly powerful, especially if you have a lot of smaller debts that feel overwhelming. Paying them off in quick succession can give you the momentum to keep tackling the larger debts.
Other debt payoff strategies
While the avalanche and snowball methods are the most popular, there are a few other strategies worth considering as well:
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The debt consolidation loan. This involves taking out a new loan with a lower interest rate to pay off multiple debts at once. This can simplify your payments and save you money on interest.
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The debt management plan. This involves working with a credit counseling agency to negotiate with your creditors for lower interest rates and payments. They handle the payments for you.
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The hybrid approach. You can also combine elements of the avalanche and snowball methods. For example, you could focus on your highest interest debts first, but pay off smaller debts in quick succession to get those “wins.”
Choosing the right method for you
So how do you decide which debt payoff method is best for your situation? There are a few key factors to consider.
Interest rates
If you have one or two debts with significantly higher interest rates than the others, the avalanche method will likely save you the most money in the long run.
Debt balances
If you have a lot of smaller debts, the momentum boost from the snowball method could be just what you need. But if you have a few large debts of similar size, the avalanche may be the better choice.
Your personality
Some people are highly motivated by crossing things off a list and getting “wins.” If that sounds like you, the snowball method could be a great fit. Others may find the avalanche method’s logical, math-based approach more compelling.
Ultimately, the best debt payoff strategy is the one you’ll actually stick to. Take a close look at your specific debts, your financial situation, and your personality; then, choose the method that’s most likely to keep you engaged and on track. Whichever approach you take, being proactive about paying down your debts is the crucial first step.
