If you’re in debt, there’s a good chance you’re looking for the quickest way to get out of it. There’s a lot of information out there about paying off debt, and it can be very confusing.
There are two main methods for paying off debt: “avalanche” and “snowball.”
- With the avalanche method, you start by focusing on the debt with the highest interest rate and work your way down.
- With the snowball method, you start by focusing on the debt with the lowest balance and work your way up.
In this article, we’ll look at these popular methods for getting out of debt, tell you which one money expert Clark Howard recommends and help you figure out which debt payoff method is right for you.
Avalanche Method or Snowball Method: How Should You Pay Off Your Debt?
When you’re in debt, the idea of getting out of it can seem daunting — especially if you owe a lot of money.
The two most important things about getting out of debt are to have a plan and to pay more than your monthly minimum on at least one of your bills or loans. Otherwise, you could spend years just spinning your wheels.
“The key to getting out of debt is: Don’t let the lenders manipulate you,” Clark says. “They always state a minimum monthly payment that stretches out your loan as far as possible and earns them the most interest, costing you the most money.”
First Things First: Know What You Owe
First of all, in order to formulate your plan for getting out of debt, you have to know what you’re up against. Clark says that means making a list that includes:
- Who you owe
- How much you owe them
- What the interest rate is on each debt
- What the minimum payment is on each debt
You can either write these down on a piece of paper or put them in a spreadsheet such as Excel or Google Sheets. You’ll need this information no matter what method of debt payoff you choose.
How To Pay Off Debt Using the Avalanche Method
The first debt payoff method to consider is called the avalanche method. Clark calls this method “laddering” because you start by focusing on the loan with the highest interest rate and then, once you’ve paid that off, you move down a rung to the loan with the next highest interest rate and so on.
To see what avalanching would look like in practice, let’s assume you have the following loans outstanding:
|Lender||Loan Balance||Interest Rate||Minimum Payment|
With the avalanche method, you would start by paying as much as possible on the credit card — because it has the highest interest rate — while paying the minimum balance on the other two loans.
Once you’d paid off the credit card, you’d move on to the loan with the next highest interest rate, the auto loan. Finally, you would pay off the student loan and be debt-free.
It’s important to remember that, in order to really make headway on your balances, you need to be paying more than the minimum payment.
“I want you to tighten the spending belt,” Clark says, “so you can put more money toward your debt.”
How To Pay Off Debt Using the Snowball Method
The other method to consider — and one that is more popular in some circles — is the snowball method. You start by paying the loan with the lowest balance first while continuing to make the minimum payments on your other debts.
So in our example above, instead of starting with the credit card, you would start with your auto loan because it has the lowest balance. You would then move on to the student loan and, finally, the credit card.
“The idea with ‘snowball’ is that by attacking your smallest debt first, you feel like, ‘Hey, I went from owing eight people money, now I only owe seven — and on like that,'” Clark says.
You Can Use a Calculator To See How the Methods Would Work in Your Case
If you want to know how each of the methods would work out for you, there’s a tool you can use.
Clark likes the calculator at Unbury.me. “With it, you put in the exact loans that you have: the loan type, the balance you have, the minimum payment they require and the interest rate,” he says. The calculator then shows you exactly how long it will take you to become debt free and how much interest you’ll end up paying over the life of your loans.
We ran the numbers we used in the example above, but paying $1,000 a month instead of the total minimum payment of $600. Here were the results:
As you can see from the graphs above, using the avalanche method, in this case, would help you become debt-free one month sooner and would save you more than $530 in total interest.
Avalanche or Snowball: Which One Is Right for You?
As you can probably guess, savings like that make Clark a bigger fan of the avalanche method.
“Mathematically, you pay off debt quicker if you do the avalanche method,” he says. “Typically, you’ll reduce your overall interest that you pay by 10% or more by attacking the highest interest rate debt as solidly as you can and then working your way down.”
Still, Clark understands why some people might find that the snowball method works better for them.
“The whole idea is that whatever method you come up with that puts you on a path where you feel the progress — where you have an end date in mind that you’re going to be debt-free — that’s core and key.”
For some people, that might mean paying off smaller balances quicker, reducing the number of debts they have. For others, the idea of saving a significant amount of money in interest might be a bigger motivator.
And for those in the middle, there’s a third option.
“There’s even one where you mix and match that is sometimes referred to as ‘blizzard,'” Clark says.
U.S. News and World Report credit card expert and consumer finance analyst Beverly Harzog came up with the Debt Blizzard method.
With it, you pay off the debt with the lowest balance first to get a jolt of confidence, then move on to the debt with the highest interest rate and follow the avalanche method.
Your unique personality and motivations will probably determine whether the avalanche or snowball method works best for you when it comes to paying off debt.
If you’re more analytical and mathematical, you will probably be drawn to the avalanche method, which is focused on what makes the most sense from a numbers perspective.
If you’re more emotional, you might appreciate that the snowball method lets you celebrate victories earlier and more often.
Whichever method you choose, the sooner you get started, the sooner you’ll have that pesky debt out of your life.
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