Debt Payoff Strategies: Avalanche vs. Snowball

According to a USA Today article, the average American consumer has approximately $6,200 in credit card debt. Car loans carry an average payment of $550 per month for a 6 year loan. Student loan debt is so high it is labeled a crisis. Luckily, more people are becoming aware of their debt and the possibility of becoming debt free. However, there is so much information about what you should do to become debt free it can be confusing. When it comes to paying off debt you may have heard:

  • Stop investing while you pay off debt
  • Consolidate your debt
  • Start with the highest interest rate
  • Start with the lowest balance
  • Focus on collections accounts first

Overall, what you choose to do needs to fit your personal situation. Take a look at the types of debt you have, their balances, and how you can realistically pay it off. Below we will take at the two common strategies used to pay off debt.

The Avalanche Method

In the Debt Avalanche Method, you pay off your debts from the highest interest rate to the lowest interest rate. With this method, the focus is on the interest and not the balance owed for each debt. For people who focus on the math of debt this method makes the most sense because you save money on interest payments when you use the avalanche.

The Snowball Method

The Debt Snowball Method is great for people who are motivated by small victories while working toward achieving a goal. With the snowball method you pay your debts in the order of smallest balance to largest balance. The idea here is you pay the minimums on all of your debt and focus on the smallest. Put all extra money you have towards the smallest debt. Once that debt is paid off, take that same amount you were applying to the previous debt and use it to pay off the next debt. You repeat this process all the way through to paying off your largest balance.

Which Method Is Best?

As I always say, personal finance is PERSONAL. How you choose to pay off debt doesn’t matter. The fact that you’re working towards paying it off is commendable in its own right. Both methods require you to focus on one debt at a time while paying the minimum on your other debts. With the avalanche method you may find it harder to stick to the plan because your highest interest debt could also be your largest balance which would mean it could take a while before you see a victory, but if you stick to it you will save more on interest payments.

Getting out of debt is not an easy task. Keep in mind it involves more than just picking one of these methods. You need to budget, learn to negotiate, make some lifestyle changes, and possibly refinance or make a balance transfer. Regardless of which method you choose, make a commitment to yourself and smash your goals.

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