Trying to pay off your debt can seem overwhelming, but there are strategies that can help. There are generally two different approaches to take to help pay down your debt, and each method has its pros and cons. There is no right or wrong answer when it comes to which method is best because every person’s debt situation differs. Sometimes it might even be a combination of both methods. It is up to you to determine what motivates you and which process may be the best fit for your situation.
What to know about the snowball vs. the avalanche method
The "snowball method," simply put, means paying off the smallest of all your loans as quickly as possible. Once that debt is paid, you take the money you were putting toward that payment and roll it onto the next-smallest debt owed. Ideally, this process would continue until all accounts are paid off. As you roll the money used from the smallest balance to the next on your list, the amount “snowballs” and gets larger and larger and the rate of the debt that is reduced is accelerated.
In contrast, the "avalanche method" focuses on paying the loan with the highest interest rate loans first. Similar to the "snowball method," when the higher-interest debt is paid off, you put that money toward the account with the next highest interest rate and so on, until you are done. By focusing on the loans that are the most expensive to carry in the long run, you should pay less over time as the higher interest loans are addressed first.
You may save some money with the "avalanche method," but if the principal is large, the time it may take to pay off debt with the highest interest can be discouraging and make it difficult to stick to the plan. Paying off small debts quickly can feel rewarding. If you prefer to see progress quickly and work your way up, then the "snowball method" may be a better fit for your debt management goals.
Putting the different methods to work
To apply the "snowball method" or the "avalanche method" to your financial situation, get organized by following these steps:
"Snowball Method" | "Avalanche Method" | |
|---|---|---|
| 1. | Make a list. Organize any payment information, total amount owed, minimum monthly payments and due dates. | Make a list. Organize any payment information, total amount owed, minimum monthly payments and due dates. |
| 2. | Sort them out. Arrange your list of accounts from smallest to largest dollar amount owed. | Sort them out. Arrange your list of accounts from the highest interest rate to the lowest interest rate on each bill. |
| 3. | Budget beyond the minimum. Determine how much extra you can afford to put toward the monthly minimum payment for your smallest debt, after paying the minimum payments on all of your other outstanding debts. Remember, if you do not have enough for even the minimum on each of your debts, it can hurt your credit score. | Budget beyond the minimum. Determine how much extra you can afford to put toward the monthly minimum payment for your highest interest rate account, after paying the minimum payments on all of your other outstanding debts. Remember, if you do not have enough for even the minimum on each of your debts, it can hurt your credit score. |
| 4. | Roll over payments as you make progress: When you’ve paid off the smallest debt, take the money previously used — the monthly payment and the little extra you budgeted — and put it toward the next-smallest debt. | Roll over payments as you make progress: When you’ve paid off the account with the highest interest rate, take the money previously used — the monthly payment and the little extra you budgeted — and put it toward the next-highest interest rate account debt. |
Perfecting your debt pay down strategy
- Build an emergency fund: Have a safety net in place before you begin a debt pay down method. While it’s good to want to become debt-free, having funds to rely on in case of situations like an unexpected medical bill or car repair should be a priority.
- Stay up-to-date on all of your current bills: Don’t start either the avalanche or the snowball method if you are late on payments, as this will only complicate your debt situation. Contact your lenders to discuss possible options to prevent late payments such as adjusting the payment due date.
- Track your spending: Be careful to not charge up additional debts while you are working to pay down your debt. Track your spending to ensure you stick to your budget. Take note on how your credit score changes. Paying down your debts may help improve your score over time.
As you work on your chosen debt pay down strategy, remember to stay focused on your end goal.
- With the "snowball method," you will enjoy those little wins and use them as motivation to keep going.
- If you are analytical and patient, the "avalanche method" may be the method for you. With the "avalanche method," it may take longer to roll over to your next account but if you have larger balances with higher interest rates and you stick to the plan, it should save you in the long run.
Either way, it will take time, but the important thing to remember is to commit to a goal and stay with it. By staying focused on your end goal, and keeping control over not adding unnecessary new debts, your existing debts should slowly melt away.
