You’re ready to pay off debt.
And the decision you’re making is life changing.
So I’m glad you’ve made it.
But when it comes to getting rid of debt once and for all, it isn’t always so black and white.
If you’ve done a google search lately, you’ve heard a lot of advice on how to pay off debt fast:
Start with the smallest balance.
No, start with the highest interest rate.
But here’s the deal:
The goal is to get out of debt and take back your financial life.
The goal is to put an end to the never-ending payments that keep you from getting ahead.
So let’s get started.
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Debt Snowball vs. Debt Avalanche
If you’ve ever gone through Financial Peace University, you’re already familiar with the debt snowball method.
But what’s the difference between that and the debt avalanche?
Here’s the quick and dirty version before we dive into the good stuff:
The Debt Snowball and Debt Avalanche are both similar in that they require you to focus on one debt, and make minimum payments on the rest.
Once you’ve got the first debt paid off, you move onto the second one, then the third, and so on and so forth.
Then once the first debt is taken care of, you take the payments you were making on it, and add those payments to the next debt.
This is what builds momentum.
So I’m going to break down both, give the pros and cons, and tell you what the research says.
The Debt Snowball
The debt snowball focuses on the balances amount.
In this method, you pay off your debts starting with the smallest balance, and you work your way up.
This method is powerful because:
People often have a lot of little debts lying around.
Maybe $200 owed to Target here or $180 to Amazon there.
And it’s a bunch of little statements coming in each month which can get overwhelming.
What I love about the debt snowball is that you focus on clearing away the little debts quickly. So it’s a great method for learning how to pay off debt fast.
Depending on your situation, this might mean you’re able to get rid of an entire debt each month for the first few months.
That feeling is great, and it does a lot to keep you motivated.
Once you start seeing the progress, you’re able to say, “I can do this.”
And when you’re getting rid of debt, that’s powerful.
You often need those little “wins” to help keep you going.
So for my visual readers, here’s what it looks like:
For simplicity, let’s say you have three debts. A Target card, MasterCard, and a car loan.
You start by arranging your debts from the smallest amount to largest amount.
Then, you would:
- Pay off the Target card first by throwing AS MUCH money as possible at it
- Pay the minimum ($75) on your Mastercard
- Pay the minimum ($200) on your car loan
In this example, you had enough money to get rid of the Target card in the first month.
Next, you’d take the $535 and add it to the minimum payment of the MasterCard.
And this is what you’d eventually end up with:
By the time you get to the car payment, you’re throwing a whopping $810 each month at it.
This is what causes the snowball effect. Your payments increase each time you pay off a debt.
Thanks to Dave Ramsey, and his book The Total Money Makeover, this method has helped thousands of people become debt free.
Now let’s move onto the next method.
The Debt Avalanche
The debt avalanche focuses on interest rates.
In this method, you start by focusing on the debt with the highest interest rate, regardless of the balance.
This method works because:
Mathematically it makes the most sense.
You’ll pay less in interest if you tackle your debts using the debt avalanche method.
And what does saving money on interest mean?
You get the debts paid off quicker!
So it’s another great method for learning how to pay off debt fast.
Let’s take a look:
You start by arranging your debts from the largest interest rate to the smallest interest rate.
Then, you would:
- Focus on your MasterCard – get it paid off
- Next, focus on the Target card – get it paid off
- Finally, you’d throw the extra money at the car loan
And this is what you’d end up with:
So what works for other people?
So since both methods have their pros and cons, I wanted to see what my readers thought.
So I asked them, “What works for you?” And here’s what they said:
“I would rather get out faster and save money so I’m using the debt avalanche method.”
“Snowball is better because of the mental aspect of it. If we had the mental to avoid debt in the first place, we wouldn’t have these problems.”
“I use the debt snowball because it’s about behavior modification! Pay off smallest to largest and you will be on fire to stay motivated and keep pushing forward. Gazelle intense!”
“I started with the snowball to get the mentality on point and I paid off two small credit cards. Then I switched to avalanche once the habit was formed and it’s working beautifully.”
What does the research say?
In short, the research says that humans aren’t really rational creatures.
The rational thing to do would be to choose the debt payoff method that saves the most money (the debt avalanche method).
So the debt snowball is ideal for someone who wants to know how to pay off debt fast.
But, according to several studies, that’s not the best method for most people:
This 2012 study showed that people are more likely to stick with their debt payoff plan if they focus on the smaller balances first (the debt snowball method)
“This snowball approach is believed to increase the likelihood of getting out of debt, as it keeps consumers motivated through small victories.”
Winner: Debt Snowball
At the Harvard Business Review, researcher Remi Trudel says he found the debt snowball method to be more effective.
Here’s what he found:
“Focusing on paying down the account with the smallest balance tends to have the most powerful effect on people’s sense of progress – and therefore their motivation to continue paying down their debts.”
Paying down larger debts first, by contrast, is less effective, the study found because people get discouraged when they don’t see a noticeable improvement.
Winner: Debt Snowball
“In the area of financial decision-making, self-control issues are significant and can plague even the most financially literate,” said Alexander Brown and Joanna Lahey.
“The standard approach advocates paying off debts in order from highest to lowest interest rates because mechanically this method results in the least amount of money paid to interest.”
The problem – again – that they point out is:
“People tend to be highly irrational and favor what feels good over what works best.”
“People also tend to be easily overwhelmed by large amounts of debt and perform better when tasks are broken up in smaller pieces.”
Winner: Debt Snowball
What’s best for you?
As you can tell, the research shows that it’s much easier to stay motivated when you use the debt snowball method.
Again, personal finance has a lot to do with psychology, so even though it might make more sense mathematically to use the debt avalanche, it’s more promising to use the debt snowball instead.
So for that reason, the debt snowball method is the strategy I recommend to most people.
But personal finance is personal, so if you’re still not sure which method to pick, here’s some advice:
- Do the math first. Use a Snowball vs. Avalanche calculator to estimate how long each method would take and how much interest you’d save.
- Try to make the rational choice. If the debt avalanche will save you thousands on interest, then see if you can stay on track with that method first.
- Keep tabs on your motivation. If you find yourself struggling while doing the debt avalanche, try knocking out a couple of smaller balance debts to get a quick energy boost.
- Start with the snowball then switch to the avalanche. I had a few readers say they knocked out the pesky smallest debts first, then switched to the avalanche method to take care of the bigger ones with higher interest rates.
Either way, both methods reach the same goal:
You become debt free.
So there’s really no right or wrong choice. The important thing is, you choose one and stick with it.
So which method did you pick?
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