How To Pay Off Debt| The Debt Avalanche Method vs The Debt Snowball Method

Living with bad debt can really slow you down in your financial journey. Paying off debt is not easy. However, mastering this can help to positively impact your finances and achieve Financial Freedom. There are two main methods you can choose from to pay off debt: the Debt Avalanche method and the Debt Snowball method.

One of these methods might be the better option for you. In order to figure out which debt payment option is best for you, you need to know how each of these methods work.

Both of these options require you to list all of your debt. This includes student loans, credit card debts, personal loans, medical bills, line of credits and any other debt you owe anyone else. The only debt you would not include in this list would be the mortgage.

You need to be honest with yourself while listing your debts. Accuracy is key. This is a very important step, as it will help you determine the amount of debt you are working with as well as make sure all of your calculations are done the right way.

Let’s use the below debt examples throughout the article:

Debt 1: $3,157.89           19.99%
Debt 2: $14,157.78         11.99%
Debt 3: $7,156.56             8.94%
Debt 4: $1,899.32            22.99%
Debt 5: $566.53               19.97%

The Debt Avalanche Method

In the Debt Avalanche method, you will need to figure out the interest rate of each of your debt. After you have listed all of you debt, write down the interest rate of each debt next to the amount. Then, organize your debt from the highest interest rate to the lowest one.

In the Debt Avalanche method, you will make minimum payments towards all of your debt except the one with the highest interest rate. Your goal would be to pay off your debt with the highest interest rate first and work your way down until you have paid off all of your debt.  In the Debt Avalanche method, you will pay off your debt with the highest interest rate regardless of that debt’s balance.

By only making minimum payments on all your other debts except one, you free up cash that you can put towards the debt with the highest interest rate to pay off that debt quickly.

Let’s organize our debt in the example from the highest interest rate to the lowest one.

Debt 4: $1,899.32            22.99%
Debt 1: $3,157.89           19.99%
Debt 5: $566.53               19.97%
Debt 2: $14,157.78         11.99%
Debt 3: $7,156.56             8.94%

In our example, we will be paying off debt number 4 first because it has the highest interest rate. After debt number 4, we will work on debt number 1, then debt number 5 and so on. This is the order in which our debt needs to be paid off in the Debt Avalanche method.

Unless the interest rate of one of our debt changes over time, we will work on paying off the debt in this order. So, we will make minimum payments on all of our other debts and put any extra cash we have towards debt number 4 to pay it off quickly.

This method makes the most sense mathematically because you’ll be paying less interest on your debts overall. And by paying less interest overall, you end up saving a lot of money during your debt payment journey.

The Debt Snowball Method

In this method, you will need to organize your debts from the smallest balance to the highest balance. The idea of the Debt Snowball method is that you pay the debt with the smallest balance regardless of the interest rate. So, you don’t need to consider your debt’s interest rate when you’re doing this method

Let’s organize the debts in our example again from the smallest balance.

Debt 5: $566.53               19.97%
Debt 4: $1,899.32            22.99%
Debt 1: $3,157.89           19.99%
Debt 3: $7,156.56             8.94%
Debt 2: $14,157.78         11.99%

As you can see in our example, we would be paying off debt number 5 first. So, just like in the Debt Avalanche method, we will continue to make minimum payments towards all of our other debts except the one with the lowest balance. This means that any extra cash that we have will go towards paying off the debt with the smallest balance and in this case it’s debt number 5. After we have paid off the debt with the smallest balance, we will continue with the next debt with the smallest balance (debt number 4) until we have eliminated all of our debt.

The idea behind the Debt Snowball method is that by paying off your debt with the smallest balance, you start to build confidence and motivation to help you keep going throughout your debt payment journey. Basically, by paying off your debt with the smallest balance you start to see results quicker and once you see that your debt balance is slowly going down, it will give you the push you need so you can achieve your debt payment goals.

Let’s face it! Paying off debt is not easy. It’s a long and tedious journey that you will need to go through in order to set yourself up for a great financial situation. You need to stay focussed during this journey so you can achieve your goal. Choosing the right debt payment method can make or break your debt payment journey.

The Debt Snowball method is for anyone who thinks they won’t stay focussed enough throughout the debt payment journey and need to celebrate small victories along the way to keep them motivated in order to achieve their goal. A lot of us are this way and will keep going if we start to see results.

On the other hand, choose the Debt Avalanche method if it’s important for you to pay less interest overall on your debts and you have no problem keeping yourself motivated to reach your debt payment goal.

Make sure you choose the best method for you so you can keep going and pay off your debt as quickly as possible for a better financial future.