There are lots of reasons to take your debts seriously–maybe you’re hoping to buy a home sometime down the line, but you need to pay off your student loans first, or maybe you’d like to open a high-interest savings account that requires a large initial deposit. Whatever the reason may be, getting yourself out of debt is always a great idea. How to do it, however, is sometimes another matter entirely.
There’s so much advice out there about figuring out how to pay off your debts, but only two specific methods are commonly endorsed by financial experts: the debt snowball and the debt avalanche. Both methods require you to make the minimum monthly payment on each of your loans so that you don’t run any risk of defaulting, and then encourage you to put any remaining money in your budget toward one specific debt. Which debt you focus on, though, depends on whether you’d prefer to gain a sense of satisfaction in the immediate future (the debt snowball) or save more money over the long-term (the debt avalanche). Here’s our explanation of both payment methods:
The Debt Snowball
Like a snowball rolling down a hill, this method starts out small and gradually develops as your payments pick up momentum. With the debt snowball, you’ll pay the monthly minimum for each debt you have, and devote any leftover money to the debt with the smallest balance. Once you’ve finished paying off your smallest debt, you’ll start applying all of the money that went towards it (the minimum payment and your leftover cash) to the next smallest debt, and you’ll continue with this process until you’re completely debt-free.
This method will give you the satisfaction of getting your smaller debts out of the way quickly. Within a few months, you’ll have fewer monthly payments to make, thereby minimizing the likelihood that you’ll ever lose track of a bill and miss a payment. If you currently have ten loans to pay off every month, and most of them have balances of $1,000 or less, the debt snowball could be a great way to make your financial life a lot more manageable.
The Debt Avalanche
With the debt avalanche, you’ll basically follow the same formula as the debt snowball, but rather than putting all of your extra money towards the loan with the smallest balance, you’ll instead devote it to the debt with the highest interest rate. On a purely mathematical level, the debt avalanche is the right move–since you’re tackling the debts with higher interest rates first, you end up paying less in interest over the course of a few years. For this reason, Trim strongly recommends using an avalanche instead of a snowball to pay off your debts.
The avalanche method requires a great deal of discipline and careful record-keeping, since the debts with higher interest rates probably carry the largest balances and will therefore take longer to fully pay off. Compared to the debt snowball, you’ll have more debts to keep track of, but you’ll end up paying significantly less in interest over time. If you have no problem keeping track of your finances, then the debt avalanche should definitely be your method of choice.
The Hybrid Method
If you’re hoping to see progress quickly but you’re also drawn to the idea of saving the most money in interest, then you can combine the snowball and avalanche methods into a personalized payment plan. Try paying off your smallest debt first to give yourself that quick win, and then switch to the avalanche method to focus on the balance with the highest interest rate.
Choosing Your Approach
Picking which method is right for you might not be easy, but the truth is that it’s hard to go wrong. While a debt avalanche could save you $10-20 in monthly interest over the course of five years (that’s up to $1,200 in savings!), both methods still provide the structure you need to pay off your loans in a timely fashion. If you’re curious to learn more, Trim’s debt payoff calculator can help determine how to most efficiently pay off your debts.