When it comes to paying down debt the most important thing is that you make consistent progress. How you go about doing that doesn’t matter nearly as much. Depending on who you ask, you will probably get one of two answers to pay your debt down: Dave Ramsey’s Snowball Method or the Avalanche Method.
Both methods approach paying off debt very similarly. They advocate making the minimum payments on each of your debts except for a single debt which you focus on in particular.
Once you eliminate your focus debt, the next debt in line becomes the focus debt. The idea of each method is you build momentum as you eliminate your debts and start to see your efforts compound and build until you are finally debt free.
Let’s break them down to see which one will be best for you.
The Snowball Method
With the Snowball Method, your debt priority starts off with the debt with the smallest balance and all your excess debt payment money goes towards eliminating that debt first. This method doesn’t take into account interest rates and instead focuses exclusively on the balance.
The idea being that by seeing progress being made rapidly against your debt you will be more motivated to stay the course and keep the ball rolling.
You start small and grow your momentum gradually, just like a snowball.
The advantage to the Snowball Method is that staying motivated is half the battle when it comes to eliminating debt. Knocking off your smallest debts is like a series of small wins and it’s easier to win the war when you consistently win the battle.
By taking on your smaller debts first, you gain the confidence to tackle your bigger debts like a car loan or larger credit card balances.
The disadvantage of the Snowball Method is that the interest rates are not taken into account, psychological progress is prioritized over the hard dollars accumulating from the interest payments each month.
The Avalanche Method
With the Avalanche Method, you focus on your highest interest debt first and make that a priority to pay down as quickly as you can. The idea is that the higher the interest, the more expensive the debt is and the more it is costing you each month to maintain.
By paying off your debts in order of highest interest rate to the lowest interest rate you will save more of your money when compared to the Snowball Method. The money saved on the high-interest debt is added to the next debt you focus on and the effect compounds as you go down the line.
Like an avalanche, it looks like not a whole lot is going on in the beginning. But once things start moving, the whole mountain of debt comes down in short order.
Mathematically, the Avalanche Method makes the most sense. You will pay less interest if you tackle your debts this way. And the larger your total debt load and interest rates, the more you will save compared to the other method.
The disadvantage to this method is you don’t see the same kind of rapid progress that you get with the Snowball Method which can be disheartening for some people.
The question of which method is superior is tricky to answer. Which method you use is up to you and there is no real right or wrong answer. The important thing is that you commit to paying off your debt and stay motivated throughout the process.
If you think that you will need small wins to stick to the plan, then you should probably opt for the Snowball Method.
If you think that immediately visible progress is less important than saving interest over the long term, the Avalanche Method may be better suited to your style.
The worst result for your current situation you can get is to do nothing and slide deeper into debt than you already are, so pick a method that sounds right to you and give it a shot.