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Deciding to pay off debt is a huge step, but it can quickly get overwhelming trying to figure out the right debt pay off plan.
Depending on which financial expert you listen to, they recommend different things for different reasons. It can get confusing on what advice to follow and why.
I am going to break down the differences and pros and cons of the debt snowball versus the debt avalanche debt pay off methods.
They are both effective in paying off debt but there are advantages and disadvantages to both plans.
In this post you will learn:
- What the debt snowball method is
- Pros and cons of the debt snowball method
- What the debt avalanche method is
- Pros and cons of the debt avalanche method
- Which method is more effective in paying off debt and why
The biggest thing to do when paying off debt that will make all the difference is to just keep going. In the end, it doesn’t matter how you get there as long as you get it done.
Find a method and system that works for you and go for it.
The Debt Snowball Method
The debt snowball method is paying off debt from the smallest balance to the largest balance, regardless of interest rates.
This debt payoff method consists of listing out all your debts from the smallest to the largest. Then you put all your extra money towards the smallest debt while paying the minimum payments on everything else.
Once you get to the last debt, you will have all extra money plus all those minimum payments to throw at the largest debt. This will make it disappear so much faster.
Your only focus is the smallest debt.
Pros of the Debt Snowball
There are a lot of pros to using this method.
Studies have shown that it is the most effective method for paying off debt. It works because it’s easier to follow through when you are able to make progress quickly. It keeps you motivated to keep going.
This method is effective because you get the quick wins which help keep you motivated to pay off more. It helps eliminate a lot of little things that are coming out of your budget to free up more money to send to the next debt.
- Quick wins
- Eliminate a lot of small debts fast
- Keeps you motivated
Cons of the Debt Snowball
Compared to the debt avalanche method, the snowball method is slower and costs more in interest. However, you’re more likely to pay off your debt using the snowball, so it works itself out in the long run.
- Cost more in interest
- Slower method
The Debt Avalanche Method
This debt pay off plan works by focusing on the highest interest rate and paying that off first.
With this method, you also only focus on one debt at a time.
This method is faster over time if you completely pay off your debt and don’t give up.
However, if you are doing this quickly, it’s not going to save you that much money in interest.
This method is fine if your highest interest rate are your smaller debts. The problem will be if they are your larger debts.
Pros of the Debt Avalanche
The pros of this method include saving money on interest and paying it off faster because of less interest accruing.
It is the most logical method based on math.
You can save money by paying off a debt with 25%+ interest rate and let the 0% debt sit there.
- Save money on interest
Cons of the Debt Avalanche
The problem with this method is that paying off debt is a psychological problem, not a math problem.
If it were only a math problem, this method would be the best.
The thing is, you are more likely to give up when using this method.
Your highest interest debt could also be the largest one. If it takes you a year or longer to pay it off, you’re more likely to give up.
- May not be as motivating
- Can take longer to feel progress being made
The Most Effective Method
The most effective debt pay off plan is the debt snowball. This is because it helps you change your mindset and stay motivated.
You get the quick wins of paying off debt fast, which motivates you to do more and to do it quicker.
Once you see that you really can pay off debt, it will help you find ways to do it even faster.
Paying off debt fast is helpful for staying motivated and actually becoming debt-free. If it is going to take you years and years, it’s easier to give up.
It can be overwhelming with either method to sit down and deal with your debt. Especially if you have a lot of little debts, like medical bills, late payments, and things like that.
With the debt snowball, you will pay those off first and get them out of your life.
Then you have less to worry about and can focus on the major ones.
Plus by the time you get to your largest debt, you will have a huge payment to throw at it to pay it off really fast.
Just like everything in finance, there are exceptions. You may need to do a different order or focus on interest rates. It depends on how your brain processes information and what will keep you motivated.
You may also have situations where you need to pay off a debt that isn’t in either order. Do what you need to do.
Should I Pay Off Debt That Has a 0% Interest Rate Last?
I get this question a lot when dealing with debt and the debt snowball.
If you are following the debt snowball plan, the answer is almost always no. There are a few exceptions.
If you are short in your monthly budget and can eliminate a debt quickly that will save your account from being overdrawn every month, then do that.
If you have two debts that are close in balance amounts, then you can pay off the highest interest rate.
The thing is, if you work a plan and do it fast, the interest rates and order won’t make a big difference math-wise.
The trick to succeeding is to just do it and finish.
This is why the snowball method works.
The goal is to be debt-free (except your mortgage) within 2-3 years at the most. In that time frame, the interest rates aren’t going to make that big of a difference.
If you are following the debt avalanche plan, then the 0% debt would be last. There still may be reasons you want to eliminate it sooner though.
Can’t I Use a Combination of Methods?
Yes! You need to find what works best for you and your budget. If you need to do things out of order no matter which method, then do it.
The point is to focus on only one debt at a time and finish.
If you need to eliminate a different debt sooner for a certain reason, do it. There may be times that you need to pay off something that isn’t the smallest or highest interest rate debt. Do it anyway.
If it will eliminate some stress and free up some needed money in your budget, do what is best for your family.
The debt snowball method is the most effective method for several reasons. It helps motivate you and change your behavior so you can actually be debt-free.
The debt avalanche method is the most logical method but depending on your debt, may not be the most effective method.
But you know what, it doesn’t really matter.
With both methods, you need to focus on only one debt at a time. This will help you stay focused and help you keep going.
The important thing is to make a plan and do it fast. The faster you can pay off debt, the better. Your goal should be to be debt-free (except your mortgage) by 2 years, 3 at the latest. I know there are exceptions to this but for the majority of people, this is true.
This is why the interest rate doesn’t matter. It won’t make that big of a difference. However, if you give up, that makes all the difference.
The best method is one that you will actually finish.