Tossing your money at various debts with no real plan may inevitably feel like a drop in the bucket.
You’ll notice there are all kinds of conflicting debt advice available today. This just goes to show there’s not necessarily a “right” way to pay off debt — it’s more a matter of figuring out which course of action makes the most sense for your financial situation.
Even after you’ve made it over the hurdle of evaluating your financial situation, there’s still the challenge of figuring out the order in which you should tackle your debts — assuming you, like many Americans, are juggling multiple outstanding balances at a time.
Tossing your money at various debts with no real plan of attack inevitably feels like a drop in the bucket. Your balances may decrease a bit across the board, but you’re still dealing with compounding interest and the hassle of making arbitrary payments across a handful of balances.
Deciding upon order for tackling your debts early in the repayment process can help you stay organized and achieve your debt elimination goals in a systematic manner. Here are two popular repayment methods worth considering: snowball and avalanche.
Lowest Balance to Highest Balance
Picture a snowball rolling down a hill. It grows in size and gains momentum as it goes. This is the idea behind the aptly named snowball method.
Here’s how to pay off debt using the do-it-yourself snowball method: Start by making a list of all your debts. Put them in order from the lowest balance to the highest balance. Now you have a plan of attack — although it’s important to pay the minimum balance on all your debts each month so you avoid slipping into delinquency. Devote more money each month to whichever debt you’re targeting at the moment. Re-assign the “savings” you’ve freed up by paying off a debt to the next-highest balance until you’ve eliminated them all.
Say you have five debts ranging from $250 dollars to $2,500 dollars. It’s less daunting to get to work on paying off the $250 balance than to jump into the deep end of your debt, right? The idea behind snowballing your debts is to use the psychological boost of paying off a small debt to motivate you to keep going. Once you have the $250 balance under your belt, working on a $500 debt seems less overwhelming.
Some experts call debt snowball the most effective repayment method precisely because it tends to motivate people to make debt elimination a real priority — and to stick with it.
Highest Interest Rate to Lowest Interest Rate
Another approach, known as debt avalanche, aims to save consumers as much money as possible by knocking out high-interest debts first.
Line up your debts in order from highest interest rate to lowest interest rate, regardless of balance. Make minimum payments on all your balances each month while devoting more money to the account with the highest balance. Once you’ve paid it off, move on to the account with the next-highest rate.
Moving down the line by interest rate means you ultimately end up paying more toward your balances and less toward interest. Many experts consider it the most logical way to tackle debts for this reason because you typically pay less overall if you avalanche.
Some people swear by the motivational boost of snowballing their debt repayments — stringing together a series of quick victories helps incentivize them to keep going. Others want to knock out their balances for as little extra money as possible no matter what, which means they turn instead to debt avalanche.
What’s most important is outlining a clear strategy and staying committed until you’ve addressed every single one of your outstanding debts.