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Which is right for you?
When you decide you want to pursue a life free of debt, your perspective on everything changes. You feel shackled, but at the same time, you feel free. The things you spend money on every day take on new meaning. Every financial decision you make becomes hinged on how it will affect your financial future. Of course, making the choice to pay off your debt is just the beginning. After that, you have to create a debt pay-off plan.
The two most common ways people choose to pay off debt is through the Snowball and Avalanche methods. While finance experts everywhere will argue all day about which is better for paying off debt, the most important matter is what works best for you. Each method has its pros and cons. Ultimately, no one method is better than another if it helps you pay off your debt.
The Snowball Method
You may have heard of the “Snowball Method” through a little personal finance guy named Dave Ramsey. The gist of this method is to pay as much as you can on your lowest balance every month while paying only the minimum on your other debts. Once you have completely paid off the lowest balance, you take what you were putting towards it in payments and begin putting it towards the next highest balance.
People love this method because it creates a “rewards” system. It’s great if you have several loans and credit balances. The idea is that by paying the smallest balance first, you will reach your goal quickly which can help foster motivation and perseverance. These are important qualities to have while paying debt because it doesn’t take long to lose hope in the dream. Becoming debt free is a hard road that requires daily commitment.
Ramsey believes that by paying the small debts first, it will be easier for people to see the light at the end of the tunnel.
The cons here are self-explanatory. With debt comes interest rates, and if your higher balances have higher interest rates, you may pay more in the long run using the Snowball method.
You have to decide what’s best for you. If you thrive on small wins, this method could be your ticket to financial freedom. If not, you may find the Avalanche method is more your style.
The Avalanche Method
The Avalanche method is based on the idea that no matter what your balances are, you should pay off debt with the highest interest rate first. No matter what anyone says, the Avalanche method will always save you more time and money than the Snowball method – IF you stay the course.
The pros are obvious here. You pay off the high interest debt first because it is compounding daily and can build quick. High-interest debt spreads like wildfire. This is especially true of credit card debt, which can have interest rates ranging between 12-30%. If you put all your money towards paying off these debts, you will become debt free faster.
The con here is that emotional wins may be spaced out between months or even years. You may become burnt out because you’ll feel like you’re not getting anywhere. For example, if you use the Avalanche method and your high interest debt also happens to be your largest… say $20,000, it could take years to pay that off. This whole time, you are watching all those little debts sit stagnant, haunting you, all while growing larger. It can cause you to become discouraged fast.
However, if you’re a “scale the highest mountain first because it’s all downhill after that” type person, this method might be best for you. It depends on how steadfast you are as a person.
What We Do
Mike and I use the Avalanche method. We use this method because our largest and most expensive debt is on our credit cards. They are all fairly equal on their balances, so paying off the highest interest rate first just made more sense. After we paid off the first high-interest card, we switched to the next one.
While we have back-peddled a little on another card because of our upcoming wedding, we are still on track to paying our high-interest debt off first. It is going to be a long road, but we’re sure we can get there eventually, and I know you can too.
What Should You Do?
No method is perfect, and no one is saying you can’t switch back and forth if you start to feel burnt out. As long as you continue paying down your debt in some form without accumulating more, you will make headway. Of course, paying down debt is a lot easier if you can find a way to increase your income. Side hustles are where it’s at. Even if you make a vow to get a second job just for a short period of time, paying an extra $200 a month on debt can greatly decrease the amount of interest you pay.
The first step is to just start. So create your debt pay-off plan and get started!!