Debt snowball vs debt avalanche

So you have finally decided it is time to get serious about paying off debt, but which method is right for you; the debt snowball or the debt avalanche? Lets look at both of them and I will tell you which one we went with and why!

If you are not familiar with my debt story, you can get a snippet of it here: http://simplybarbaracasey.com/a-debt-story/

So, I have been reading and researching about debt payoff methods for years but never actually implemented anything strategic. We simply just threw money at whatever was due first and made the minimum payment to get by and that was it. When I first read about Dave Ramsey and his debt snowball method, it was like a light bulb went off. This makes perfect sense, but then I heard about the debt avalanche on a ChooseFI podcast (Find the ChooseFI podcast on their site here: https://www.choosefi.com/) and I thought, oh gosh, this makes sense too! So let me tell you a little about each one and you decide which one is best for you!

The debt snowball.

The debt snowball is so easy to understand. Basically, you list all your debt from the lowest balance to the highest and that is the order in which you pay them. You don’t need to worry about which balance has the highest interest rate, that is not important here. This principle is based on psychological principles. If you start out with the highest balance, you may start out great and do good for a month or so, but you may lose steam quick if you’re not making progress quickly. This path allows you to make small wins early on and it gives you the momentum to keep going. Now I am sure you’re thinking but shouldn’t I pay my high-interest credit card first? Not if it has the highest balance.

Here is exactly how you use the debt snowball:

  1. List all your debts from smallest balance to largest balance
  2. Make the minimum payments on all balances.
  3. Any extra money, no matter how small goes to the smallest balance first.
  4. Once you pay off your first listed debt (do a little dance and celebrate your achievement) take the money that went to that payment and start throwing it at the second balance on your list!
  5. Repeat until all your debt is paid!

I wrote out all my debt and used a red pen to mark off what we had paid off. We made some great strides early on and it felt good to see items crossed off our list (I love list, and crossing things off them, so this was fun for me!) I kept it on my fridge so I could see it all the time.

The debt avalanche.

So the debt avalanche basically says to list your debts, start with the debt that has the highest interest rate and that is where you start. The theory is to pay as little in interest as possible. You use the same method of paying minimum payments on everything else while throwing everything extra at the top listed debt (the one with the highest interest). Once you have paid off a debt, you move to the next highest interest balance and so on. While this method may save you some money, you may not see victories right away, especially if your high interest debt carries a large balance. If you don’t see victories right away it may be hard to stick to.

When I first heard about this method, I thought it made total sense to do this one. I mean I wanted to save money to pay off even more debt so it was a no brainer right? It seemed pretty obvious, so what did I choose?

My method of choice.

I immediately listed my debt from the largest interest balance to the smallest. Of course, my Tahoe came in at the top with the highest interest (my interest rate was stupid ridiculous because I just had to have the Tahoe) and the highest balance. I sat and figured out how long it would take me to pay off the almost 20,000 balance and I started getting anxiety. It was going to take me approximately 10 months of serious budgeting to pay it off. And while I knew it was possible and ten months really isn’t that long, it seemed like forever and a day away. I needed small wins first, I had to change my mindset. So I chose the method that psychologically would help me feel like I was winning. So I changed the plan and listed all my debts from smallest to largest. We paid off all of our medical bills and credit cards within a month or two, then we attacked the Nissan which had half the balance (and a fraction of the interest rate) but man did it feel good. Honestly, it set us up to feel like we could totally conquer the Tahoe next!

Once we get to the student loans, I will do the same thing with them and pay them off using the snowball method. I can’t wait to cross those pesky loans off one by one. (Be sure to stay plugged into my blog to stay updated on our journey!)

Are you on your journey to being debt free? Did you use the debt snowball or the debt avalanche?

Feel free to comment below and as always thank you so much for reading!

Barbara

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