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If you want to be debt free, you need a strategy. A method.

The average US household has $54,000 in credit card debt.

You need a plan. You really do.

The good news is that you have more than one option.

There are several ways to get out of debt, but the two most used ways are called the debt snowball and the debt avalanche.

Let’s look at the differences and see what works best for you…

Two Methods

I’m going to go over two methods for paying off debt.

There is no right or wrong here. It depends on you and your situation.

I used the debt snowball to get out of debt and it worked for me. That’s what’s important…it worked!

If you become debt free, you win. It doesn’t matter which method you used once you are debt free.

Debt Snowball Debt Avalanche

The debt snowball and the debt avalanche are very similar. Here’s how they work:

You pay the minimum on all your payments, except one. Once that is paid off, you add that payment to the next debt. Either way, it turns into a snowball or an avalanche and your debt will melt away.

The difference is in the order that you will pay off your debt.

Let’s look at these methods in detail…

The Debt Snowball

The debt snowball (made popular by Dave Ramsey) is a method for paying off all your debt by starting with the lowest outstanding balance.

You put as much money as you can towards your lowest balance, while making the minimum payment to every other account.

Once your lowest outstanding balance is paid off, you put as much money as you can towards your second lowest outstanding balance. You repeat this method until you are debt free.

Related Book: The Total Money Makeover.

Example: Jim has four different debts to pay off. Two credit cards, a student loan and a personal loan.

Here is the order that Jim would pay off his debt:

  1. $12,000 credit card (11% interest)
  2. $15,000 credit card(18% interest)
  3. $19,000 personal loan (6% interest)
  4. $22,000 student loan (8% interest)
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Debt Snowball Benefits

The idea behind the debt snowball is to create a series of “small wins” and “early success”. This is especially true if you have several different debts to pay with low balances.

It’s generally pretty easy to pay off a few small balances, then you have all of that extra money to start adding to your other debts.

Also, if you have tried to pay off your debt before and failed, you may want to consider the snowball, because statistically, people are more likely to stick to it.

Debt Snowball Drawbacks

When you pay your smallest balance first, you don’t pay attention to the interest rates, therefore, you will end up paying more interest and it will take you longer to get out of debt.

If you’re all about the numbers and you don’t need the emotional support of having small wins, the debt avalanche may be better for you.

The Debt Avalanche

The debt avalanche is very similar to the debt snowball, except you pay off your debt in order of interest rate.

You put as much money as you can towards your highest interest rate debt, while making the minimum payment on every other account.

Once your highest interest rate debt is paid off, you put as much money as you can towards your second highest interest rate. Then you would repeat this method until you are debt free.

Related Book: The Money Book for the Young, Fabulous & Broke

Example: Remember Jim? Let’s use the same debts and order them for the debt avalanche. Two credit cards, a student loan and a personal loan.

Here is the order that Jim would pay off his debt:

  1. $15,000 credit card(18% interest)
  2. $12,000 credit card (11% interest)
  3. $22,000 student loan (8% interest)
  4. $19,000 personal loan (6% interest)

Debt Avalanche Benefits

With the debt avalanche, you will pay less money in interest. If you are only concerned with paying as little as possible to the banks and loan companies, go with the debt avalanche.

You will also be out of debt quicker with this method, since you are attacking those high interest rates first.

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Debt Avalanche Drawbacks

You may not get the small motivational wins in the beginning.

If your highest interest debt is one of your largest, it may be a while before you really start to see progress.

If you think the debt avalanche makes the most sense, but you still need motivation, try Ready for Zero. It’s an app that tracks your progress and motivates you along the way to keep paying off your debt, starting with the highest interest first.

What’s Best for You?

It really comes down to your situation. It all comes down to you!

Debt snowball avalanche choice

The debt snowball works great for someone with a large amount of small outstanding balances, because you will be quickly freeing up money to put towards other debt.

The debt avalanche works great for someone with a large amount of very high interest credit card debt that needs to be paid off quickly.

It also depends on your personality. If you know you need a lot of motivation, consider the snowball. If you are all about the numbers, consider the avalanche.

Don’t forget that money can be a very emotional thing. Too often, people argue their side with pure math. That’s not how money works. At least, not with personal finances.

Sometimes the right method may not make the most sense on paper, but if it works, you still win!

‎‎Photo Credit: Dinkel, Shena, Subharnab | Stats

*Part of Financially Savvy Saturdays on Femme Frugality and A Disease Called Debt*

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