The two most popular ways of paying off debt are the debt snowball and debt avalanche methods. (Don’t ask me why they both reference snow.)
As I mentioned here, Mr. TMG and I are using the debt snowball method, which I believe is the best way to pay off debt.
With the debt snowball, you pay off your debts smallest to largest, regardless of interest rates. As each debt is knocked out, you roll the minimum payment into the payment for the next highest debt. The quick wins of paying off your smallest debts motivate you to keep going.
The debt avalanche method, in contrast, orders your debts from highest interest rate to lowest interest rate, regardless of balance. If we’re looking strictly at the math, the debt avalanche should help you pay your debt off more quickly and save you more money on interest.
How to prepare for your debt payoff journey
Before you begin any debt payoff method, there are a few steps you should take to prepare.
1. Fix your mindset about your debt. I know how overwhelming it can feel, but you have to believe you can turn things around before you can actually do it. As Henry Ford once said, “Whether you think you can or whether you think you can’t, you’re right.”
2. Determine why you want to get out of debt. This is especially important if you’ve got a lot of debt that will take a while to pay off. Knowing your why will keep you motivated.
3. Create a budget to see where your money is going. The budget should include all of the minimum payments for your debts. Once you create your budget, you’ll probably find money you didn’t realize you had because it’s been slipping through your fingers every month.
4. Set clear, written goals for your debt payoff plan. Make sure to write your goals down, as studies show people are more likely to achieve written goals than unwritten ones.
Related: 8 Tips for Setting Financial Goals and Crushing Them
5. Set aside a small emergency fund, if you don’t have one. Having a buffer will prevent you from going further into debt while you’re trying to dig your way out.
How to use the debt avalanche method
Now that you’ve laid the foundation, it’s time to get started.
List your debts, aside from your mortgage, beginning with the highest interest rate and ending with the lowest. Pay the minimum payments on everything but the one with the highest interest rate.
Use the extra money you identified in your budget to pay toward the highest interest rate debt. (By the way, if you don’t have extra money in your budget, you have to earn more, spend less, or both.) If you get any money you’re not expecting, throw it at the debt with the highest interest rate, too.
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Keep chipping away at the highest interest debt until it’s paid off. Once it’s paid, use the minimum payment for that debt, along with the extra money you’re able to squeeze out of your budget, to attack the debt with the next highest interest rate.
Repeat this cycle until all your debt is paid off.
Remember, with this method, you’re not concerned about the balance on each debt. You’re strictly looking at the interest rates.
Is the debt avalanche method right for you?
Often debts with higher interest rates have higher balances. This means it takes longer for you to see the “win” of paying a debt completely off.
If you’re methodical and can keep yourself motivated, this method may work well for you.
If you prefer the traction that quick wins give, you may want to use the debt snowball method.
Similarly, if you have a debt with a really high balance that’s wildly different from the others, you may want to try the debt snowball method instead.
For example, for Mr. TMG and me, one of our debts, not including our mortgage, is over $300k.
Related: Our Debt Payoff Plan: Paying Off Over $670,000 of Debt
If we had used the debt avalanche method, this debt would have fallen near the top of our list because of the interest rate. It’s going to take years to pay off, and we likely would have lost our motivation by now.
Whichever method you choose, be careful that you don’t burn out and end up quitting before you’re finished paying off your debt.
Ultimately, the best method is the one that works.
Are you paying off debt? Which debt payoff method do you prefer?
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Hi, I’m Rho! I’m a wife, mom, and Biglaw associate who believes that true wealth is having control of your time. I help busy lawyers like you take back control of your time by teaching you how to achieve lifestyle freedom through mindset shifts and financial independence. Read a little more about me here.
