Don’t you just wish you could pay all of your debt off like this:
One day! As you know, one of my major goals for all of my Nearly Wealthy homies is for us learn how to pay off our debt. There are a vast number of resources on the whos/hows/whats/wheres and why’s of paying off debt all over the Internet and I’ve often found differing thoughts and opinions on the best method of doing so. There seems to be two main methods that seem to be the most popular among anti-debtors: the Debt Avalanche versus the Debt Snowball. Then there’s those in betweeners, like me. Forever the rebel. I have used the Debt Avalanche method for the first two credit cards I paid off, but as of this year, I’ve switched to the Debt Snowball method. Sometime it’s hard to know which way to go and which methods to use when paying off debt. Today I’m going to talk nerdy to you and inform you of the two different methods you can use to pay off debt, as well as sharing what I think is the most important aspect of debt payoff.
The Debt Snowball
The Debt Snowball is famously accredited to Dave Ramsey. Ramsey has figured out the method that works with a person’s emotions. The reason this method works is due to how it keeps you motivated during a long debt payoff. You’re looking for the emotional wins and (almost) instant gratification.
When starting the snowball method, you’re asked to write down your debts in order of balance ascending. Basically, you start with your smallest balance debt. It doesn’t matter what debt you have. Some even include their mortgage in this process. It depends on your goals. Here is an example:
The Debt Snowball method of paying off debt involves listing your debts in order of lowest to highest balance. You pay off the lowest balance card or loan first, and then move on to the next lowest card, taking that minimum payment from the first card and applying it as an additional payment toward the second card. You then continue snowballing the payments as you pay off more and more loans.
Once you pay off the first debt, you move onto the next one, using the money you would spend paying the first debt to add on top of the second’s payment. This action is what creates the snowball. Paying off a debt is a huge accomplishment and it helps build your confidence on being able to handle your debt reduction plan. This plan is all psychological. The little emotional wins keeps you going from debt to debt, paying those suckas off like a master
As you pay off more debts, you can add more money to your monthly payment. The key to this method is to pay more than the minimum payment on each debt you are working on at the time.
By using this method, I find it easier to stay more motivated, more encouraged and that and essentially paying off debt faster. Although we may be likely paying more interest in the long-run, the risk of giving up on our debt payoff plan was less likely than versus the Debt Avalanche.
The Debt Avalanche
The Debt Avalanche method is more about math than emotions. It has nothing to do with our psychological mindset, but is pure mathematics. If you like math (I don’t), then the Avalanche method could be your jam. Some experts suggest creating some celebration milestones, because unlike the Snowball method where you can get the “quick” wins by paying off smaller balances, first, the Avalanche can take you a little longer.
In my case, my higher interest rate debts were also some of my higher balances. This caused me to work harder and longer to pay them off, but it also saved me the most money with regards to interest payments. This is why I chose this method and it worked for me. It won’t work for everyone because it can be hard to stay motivated. It definitely was for me.
In order to start the debt avalanche approach, you would take your debts and list them by interest rate, descending from highest interest rate first to lowest. When you list your debts by interest rate, descending, you are effectively taking the shortest amount of time to pay off your debt AND you are also going to save the most money in interest. When you take out the highest interest rate first, you are saving the difference in percentage rate from one debt to the next. You have to pay off the debt in the same way as the snowball, by adding any extra you can toward the payment, and then using your first debt payment on the second debt. You continue this until all your debt is paid off. This method makes the most sense financially and mathematically, but it will not work if you don’t have the will power to continue the debt reduction plan.
Which is Better?
You can probably see why people have differing opinions about which method is better than the other. But let’s be real, I could care less which one you use, as long as you use one! Remember, you’ll never pay off your debt if you just sit there comparing plans and watching cat videos. You need to step it up and get started. The good thing about paying off debt is you can create any method that works for you. You can start with the Snowball and switch to the Avalanche. You can go either way. Get it how you live and do whatever works best for you!
Now, I would be doing ya’ll a disservice if I failed to mention another method:
I personally have not used this method, but debt consolidation is also an option for getting debt paid off. By consolidating your loans and cards into one single loan with one single payment each month, the focus to become debt free stays strong, knowing that once that one loan is gone, you’re done and debt free. Debt consolidation, however, comes with a risk: the risk to start using those credit cards that you paid off by consolidating everything. If you haven’t changed your mindset and resolved to get and stay debt free, the debt consolidation method of paying off debt can easily lead to more debt, not less, if you start using those credit cards again without a plan to pay them off each month. If you’re still struggling with temptation to use credit cards, the debt consolidation plan probably isn’t for you.
At the End of the DAY…
The most important aspect of debt payoff, however, isn’t which method you choose to pay off your debt. It’s that you do indeed pay it off and don’t go back into debt. Try one plan, try all of the plans: just make sure you keep doing what you need to do and working your debt payoff plan (or plans) until debt freedom becomes a reality.
In the end, it’s not just about the money, but also our mentality. If we can stick through the tough times, then either method could work for us.
Which debt payoff plan worked or is working for you? How has your debt mindset changed in recent years?