Being in debt is no fun and for some people it’s soul-crushing. Those of us with it are looking to get out of debt as soon as possible.
There are tons of debt repayment strategies, but the two most popular are the Snowball and Avalanche Methods. They each have their own pros and cons, but one of these strategies has helped us pay down more than $30,000 of debt in the past year.
The Snowball Method
The Snowball Method gets you out of debt by reducing the number people you owe, one by one. You pay down your debt based on the size of the balance. You pay off your smallest debt first, then repeat the process.
Here are the basic steps to using the Snowball Method:
- List all your debts from biggest to smallest. For example, your $10,000 loan should be higher on the list than your $2,000 loan.
- Make the minimum payment on every single debt you have.
- Put any extra money you have towards your smallest debt.
- Do this every month until you pay off that particular debt.
- Once that’s paid off, repeat the process until you pay off all your debts.
As time passes, you see fewer and fewer bills in your mailbox. If you avoid checking your mailbox because you know it’s nothing but bills, this strategy may appeal to you. It’s an amazing feeling to one less person you owe. Often times, that feeling motivates people to pay off even more debt. Positive emotions and fast results are the main reasons people choose this strategy.
The Avalanche Method
The Avalanche Method gets you out of debt by reducing the amount of money you owe, dollar-by-dollar. You pay down your debt based on the size of the interest rate. You pay off the debt with the highest interest rate first, then repeat the process.
Here are the basic steps to using the Avalanche Method:
- List all your debts by interest rate from highest to lowest. For example, your credit card debt with the 15% interest rate should be higher on the list than your student loan with a 5% interest rate.
- Make the minimum payment on every single debt you have.
- Put any extra money you have towards your debt with the highest interest rate.
- Do this every month until you pay off that particular debt.
- Once that’s paid off, repeat the process until you pay off all your debts.
With the Avalanche Method, it takes more time to get your first debt paid off. So if you lack motivation or determination, this strategy may be hard for you to follow.
The Snowball Method vs. The Avalanche Method
The Snowball Method focuses on reducing the number of people you owe, while the Avalanche Method focuses on reducing the amount of money you owe. The Snowball Method offers quick-wins, while the Avalanche Method does not. The Snowball Method may motivate you, while the Avalanche Method may not.
It would appear that the Snowball Method is clearly the way to go, right? Wrong. Paying off your debts one at a time is actually a terrible idea.
Believe it or not, the Avalanche Method is the better option. Yes, it may take longer to see results, but it gets you out of debt way faster. Yes, it depends on a person to be self-motivated and determined. I don’t know about you, but being in debt is all the motivation I need to get out of debt.
To drive home my point a bit further, let’s use the unbury.us web app to walk through an example.
Here are a few things you should notice about the numbers:
- The debts have different balances and interest rates.
- The largest debt has the second lowest interest rate.
- The smallest debt has the highest interest rate.
- The minimum payment for all four debts is $200.
Let’s say we had $300 to put towards this debt. Let’s see what happens if we pay an extra $100 every month starting September 2017.
Using the Snowball Method
Using the Snowball Method, you’d be debt free by December 2025 and pay $8679 in interest.
Using the Avalanche Method
Using the Avalanche Method, you’d be debt free by July 2025. That’s five months sooner than using the Snowball Method! Also, you would only pay $7120 in interest. That’s over $1500 in savings!
If you’re looking to get out of debt as quickly as possible, the Avalanche Method is for you. It may take longer to pay off your first debt, but it gets you out of debt faster. The Snowball Method may help motivate you to pay off more of your debt, but motivation is fleeting. It’s better to have determination. If you follow the Avalanche Method, you’ll be out of debt in no time.