If you’ve spent any amount of time looking for the best way to get out of debt you’ve likely run into people talking about debt snowballs and debt avalanches. So what is all the fuss about?
The debt snowball is a debt repayment method that was popularized by personal finance expert Dave Ramsey. This debt-repayment method focuses on paying off your smallest balances first while making minimum payments on all other debts. The idea behind this method is that you will see progress faster which will keep you motivated to keep paying things off.
In opposition to the debt snowball, you’ll find something known as the debt avalanche (So many cold-weather references!). This debt-repayment method focuses on paying off your balances with the highest interest first while making minimum payments on all other debts. The debt avalanche makes the most sense from a numbers perspective since it will save you the most in interest expenses.
And then there’s the debt sprinkle, a term I just made up for how most people tackle debt. This debt-repayment method is where you pay a little extra on every payment, making little to no impact on any of them and ultimately accepting that debt is an unavoidable part of life. What do ya say we go ahead and avoid this method altogether?
So which method is the best way to get out of debt? Well, that depends on you now doesn’t it.
The debt snowball is the method I used to get out of debt. Making the last payment on a debt at the beginning of the process is a powerful motivator, at least it was for me. Humans are emotional creatures and most of our decisions are made from an emotional place (Yes, I’m talking about you too). The quick wins that you can get from the debt snowball help inspire you to keep going.
If it were just a numbers problem the debt avalanche would make the most sense. But if that high-interest loan is going to take 9 months to payoff you could lose a lot of momentum during that time. In fact, the sense that you’re not making progress could cause you to give up altogether.
So which method is best? The method you’ll stick with (and definitely not the debt sprinkle!).
If you’re still feeling uncertain then feel free to give this exercise a try.
Make a master list of all your debts, their balances, the minimum payments, and the interest rates. Now put them in order by balance, smallest to largest. This is your debt snowball. How many debts could you pay off in the next 3 months using this method?
Now list those same debts, highest interest to lowest. This is your debt avalanche. Same question, how many debts could you pay off in the next 3 months?
Based on this exercise, which method makes the most sense for you? Which one do you see yourself sticking with for the amount of time it’s going to take to pay off all your debt?
Did you choose the snowball or the avalanche and how long before you’re debt-free?
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Years ago, my wife and I used the debt snowball. These days, I still think I would have used the debt snowball even though we are a lot more financially literate now, understanding that paying off the highest interest first makes the most sense from a numbers perspective. Still, it’s why Dave Ramsey promotes this method, and you’re absolutely right. We’re emotional creatures!
The debt snowball worked best for us too! It’s easy to overlook the emotional component of money.