What’s the Best Way to Tackle Debt?

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Getting rid of debt isn’t easy, but if you’re ready to do what it takes, you can shake off any amount of debt. Let’s explore the pros and cons of two popular approaches for paying down debt, the snowball method and the avalanche method.

The snowball method

This approach involves focusing on paying off the smallest debt first and then working on the next-smallest debt until it’s all paid off.

Say you’ve squeezed an extra $500 out of your budget to channel toward paying down debt and you have the following debts.

  • $2,500 personal loan at 9.5% interest; minimum payment $50
  • $10,000 car loan at 4% interest; minimum payment $225
  • $13,000 credit card debt at 18.99% interest; minimum payment $250
  • $18,000 student loan at 4.5% interest; minimum payment $300

In this scenario, the snowball method would have you paying just the minimum payment on all debts except for the smallest one. You’d put your extra $500 toward paying off the personal loan. Once that’s paid off, you’d take the $550 you were paying toward the personal loan and add it to the $225 you’re paying for the car loan. You would continue doing this until you’ve paid off all of your debt.

If you need help setting a budget to reach this financial goal, try using our free online personal financial management tool, My Financial Partner. It can help you establish a realistic budget so you can find extra cash for paying off debt.

Pros of the snowball method

The most significant draw of the snowball method is that it works with behavior modification. Success breeds success, and the small but quick wins are excellent motivators.

Cons of the snowball method

The primary disadvantage of the snowball method is its indifference toward interest rates. Paying off the smallest debt first can mean holding onto the debt having the highest interest rate the longest. This translates into paying more in overall interest throughout the journey to a debt-free life, sometimes to the tune of several thousands of dollars.

The avalanche method

This approach involves getting rid of the debt with the largest interest rate first and then continuing on to the one with the next-highest interest rate. This enables the debt-payer to shed heavy interest rates quicker and to put more of their money toward the principal of their loans.

In this scenario, the avalanche method would involve paying down the credit card debt first, followed by the personal loan, student loan and finally the car loan.

Pros of the avalanche method

Paying off the debt with the highest interest rate first can save hundreds, and sometimes thousands of dollars in interest. Also, in most cases, this route will be shorter than the snowball method.

Cons of the avalanche method

The avalanche method requires self-motivation and continued momentum despite little initial progress.

Which method is right for you?

If you think you’d need early motivation to keep going, you may want to choose the snowball method. If your main concern is paying as little as possible, then you might want to go with the avalanche method. Before you make your decision, you may want to run your numbers through our debt calculators to see how much interest you’d be paying using each method and how long each approach will take.

If you’re serious about tackling your debt, either method can work. Choose a method and get started today!