Last week, I covered the first step in paying off your debt – knowing just how much you have! The next step is figuring out how you are actually going to pay off the debt! Next week, I’ll talk about finding extra money (whether it’s through earning it or cutting back), but this week I’m going to talk about figuring out what approach to paying debt is best for you. I’ll cover two of the most popular strategies:
- Debt avalanche
- Debt snowball
1. Debt Avalanche
With the debt avalanche route, you first target your debt with the highest interest rate. You don’t target the debt you owe the most (or even the least!) on – instead, you target the debt you are paying the most interest on.
For example – you have two credit card balances:
- On Card 1, you owe $5,000 at 10% interest
- On Card 2, you owe $2,000 at 20% interest.
With the debt avalanche approach, Card 2 is now your priority to pay off, even though you owe more on Card 1 than you do on Card 2. If you can put an extra $100 over the total minimum you are paying on Card 2, you will pay off Card 2 much faster. Once you have completely paid off Card 2, you can then put that extra money towards Card 1.
The main advantage of going the debt avalanche route is that you are saving more money by first tackling debts with the highest interest rate. So the debt avalanche route is excellent if you are concerned with paying as little interest as possible.
1. Debt snowball
With the debt snowball route, you prioritize your smallest debt, no matter the interest rate. For example, you have three credit card balances:
- On Card 1. you owe $5,000 at 10% interest
- On Card 2, you owe $2,000 at 20% interest.
- On Card 3, you owe $1,000 at 5% interest.
With the debt snowball approach, pay off Card 3 first (throwing any extra money at it that you can), even though the interest rate on Card 3 is lower than it is on the other two cards. After you have paid the balance on Card 3, you move on to Card 2.
The main advantage of the debt snowball route is that you get the “win” of paying off debt quickly. So the debt snowball approach is great if you need a constant boost to help keep you on track.
What’s best for you?
That depends on your personality! If you’re the kind of person who needs to have a quick “win” in order to keep yourself motivated, then I recommend the debt snowball approach. If you hate the idea of paying extra interest and know you can keep yourself motivated, then the debt avalanche is the route for you!
To get started, check out this great calculator that can tell you how fast you’d be out of debt using each approach. No matter how you pay off your debt, you’ll feel better the sooner you get started! Tell me in the comments which route you prefer!
