The debt avalanche and the debt snowball are both approaches to pay off debt with the goal of being consumer debt-free. In this post, I want to share with you what each method is to help you decide which approach you want to take to pay off your debt.
What is the Debt Avalanche Method?
The debt avalanche method is simply paying off your loans starting with the highest interest rate first. Any extra money you are applying to debt would go towards the loan with the highest interest rate, while making minimum payments on the rest of your loans. As you pay off one loan, you focus your extra payments on the next highest interest rate, and so on.
Since you are paying off the loans with the highest interest rate first, you will be paying less interest overall. If you work at the same momentum, is likely that you will pay off debt quicker than the snowball method. The downside is if your loan balances are large, it is easy to loose motivation.
What is the Debt Snowball Method?
The debt snowball method is paying off your loans with the smaller balances first, regardless of interest rate. Any extra payment would go towards the smallest balance loan, while paying minimum payments on the rest of your loans.
Once that loan is paid off, you would snowball that payment to pay off the loan with the next smallest balance. That means you take the money you were paying on the paid off loan, and add it to the payment of the next smallest interest loan. This method is great if little wins keep you motivated. It is also nice to knock out a few loans quickly if you have small loans.
Where do I start?
With either method, the first step is to write down all of your debt (including credit cards, personal loans, student loans, car/motorcycle/boat etc. payments) Include how much each payment is, the interest rate and the total amount to pay off the loan. For this part, I would leave out a mortgage payment for a couple of reasons. The first being that it would be extremely overwhelming to look at a number that is likely six figures and the second reason is that a homes value does not depreciate like a car would.
The next step is to create a budget and determine how much extra you have to apply to your debt.
Which method is best?
With either method you choose, it is best to apply the minimum payments to all of your loans except the loan you are focusing on. If you are someone who is more analytical and like to look at the numbers, the debt avalanche method may be best for you, but if you are someone who needs motivation through small wins, then the debt snowball method may be the better option. Whichever method you choose, it is important to stay motivated and focused on the end goal of being debt-free.
Have you tried either of these methods to become debt free?