As the new year starts up, so does the debate about the best way to pay your debts. There are a myriad of debt reduction strategies, but the debate rages on and centers around the two primary options: using the Debt Snowball method versus the Debt Avalanche method. Each method works well when someone puts up the appropriate effort to pay down their debts. I am not here to preach one way over the other because I believe each are great methods. I am here to tell you why I chose the Debt Avalanche method to pay down my over $50,000 of credit card debt.
No matter what type of debt you have, the first step to getting out is to stop accumulating more debt. If you have a spending problem, then cut up your cards. If you have a shopping problem, then stop going to stores. You will never succeed paying your debt if you don’t take care of the original cause of your problem. After you stop accumulating debt, you will need to understand the severity of your debts. For me, it was all credit card debt. I had 6 credit cards totaling over $50,000. I accumulated my balances by funding my business along with a bout of frivolous spending. I wrote all of my debt down on a whiteboard because I am a visual person.
As I wrote all of my debt down on my whiteboard, I also listed their balances, due dates, interest rates, and minimum payments. This tactic gave me the ultimate perspective into my debt. My next step was to decide whether to roll with the snowball or jump in with the avalanche. Here is my breakdown on how I came to my decision to use the Debt Avalanche.
Using the debt snowball method is touted due to its ability to meet the emotional aspect of money. You are pressed to list your debts ascending by balance owed. You then pay the minimum payments for all of the debts except for the smallest balance. The smallest balance loan should have any extra money you have applied to the loan. For example, if you have 2 loans, one with a $15,000 balance and one with a $5000 balance, you would start working on the $5,000 balance first.
You pay the smallest balance first because you will be able to pay off that debt quickly. The quicker you are able to pay off the loan, the better you will feel about your debt repayment plan emotionally. Emotions run our lives, especially when it comes to our money. I wanted to take the emotional aspect out of my debt decisions. I figured that since emotions got me into my debt mess, I needed to take emotions out of the picture in order to get out of debt.
While I am an emotional person, I am also very number oriented. I can’t say that I like math, but I respond to it well. I can debate with emotion, but I can’t debate with math. Math is either right or wrong. The Debt Avalanche method leaves emotion at the door and focuses on mathematics.
If you are not familiar with the Avalanche method, here is a quick breakdown. You start by listing your debts descending by interest rate. For my example above, let’s say that your $15,000 balance has an interest rate of 19.99% and your $5,000 balance has a rate of 13.99%. You would work on tackling the $15,000 debt first. While it might take a longer time to pay down that debt, it will save you money with regard to interest paid.
I can talk about these two methods all that I want, but I figured it would be better to show you. I went to a great snowball versus avalanche calculator and entered my example debts above. This is what I got back.
With the Debt Snowball method, you will see that you will be debt free by June of 2018. After it is said and done, you will have paid $12,712 in just interest alone. Now, let’s check on the Avalanche method.
Using the debt avalanche method, you will be out of debt by February 2018 and have paid $10,728 in interest alone.
When I first calculated my debts using Unbury.me, it opened my eyes into how much interest rate affects my overall debt. In my example above, you will finish paying off your debt 4 months earlier and save $1,983 worth of interest. When you are paying down debt, you don’t want to pay more than you have to. You also want to be done as quick as possible. This is why the Debt Avalanche method makes sense. It takes the emotion out of paying down your debt and replaces it with simply mathematics.
If you are about to embark on a debt reduction plan, I would highly recommend checking out a calculator to see which method will work for you. Each person has to select which method would work best for them and which one they will continue until their debt is paid off. Neither method works unless you are dedicated to it 100%!
The articles are written by personal finance enthusiasts (not certified professionals) based on their personal experience. What works for them may or may not work for you, and you should always consult a financial advisor before making important financial decisions.
In accordance with FTC guidelines, we disclose that we have a financial relationship with companies mentioned in this website. This may include receiving access to free products and services for product and service reviews and giveaways.
Any references to third party products, rates, or websites are subject to change without notice. We do our best to maintain current information, but due to the rapidly changing environment, some information may have changed since it was published. Please do the appropriate research before participating in any third party offers.