Winter is Coming...Debt Pay Off Style

There are two main schools of thought on how to best pay off your debt. Both include massive amounts of snow, so pull out your beanies and get ready for a snowstorm of take out your debt.

Avalanche Method
A Debt Avalanche is a method of repaying debts where you pay enough money to make the minimum payment on each debt, then put any remaining money to paying the debt with the highest interest rate.
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Debt Snowball
A Debt Snowball is a method of replaying debts where you again pay enough to make the minimum payment on each debt, then put all your remaining money (obviously after basic living costs) to paying the smallest debt off first.

Dave Ramsey is a big proponent of this method:

Logically, I favor the Avalanche Method as it will save you the most money on interest costs. However, in my experience of trying and failing to pay off debt (and eventually succeeding!) the Debt Snowball is the winner. The issue is, paying money off should be logical, but it's not, it's psychological.

I needed to feel like I was making progress. Every month that I could pay 1-2 loans off and have less minimum payments to make, I gained confidence and felt like I was making progress. Also, my finances became simpler as I had less loans and less minimum payments to make. I ended up knocking out my small annoying debts, and leaving some big ones to tackle. Then, when I could see that a HUGE chunk of money every two weeks what getting hurled (like snow) at my big debts, I really got excited.

We paid off 50k in about 8 months. Originally, I had calculated it would take 2 yrs. However, things happen when you gain momentum. When you are really dedicated to paying off debt or to saving money (really, any goal with good intentions) you will be surprised what will happen.

Now, obviously, the Debt Snowball worked for me, but in complete transparency, I believe there was one high interest debt that was about $1000 more than another one and we took that one out before the smaller one. So we did not follow it perfectly. As long as you have a plan, either method is great, and if you have to switch or move around, that's completely fine.

The idea is to focus on paying one debt down while still making minimum payments on the others. I have talked to people who try to pay a little bit extra on everything and feel stagnant, frustrated, and hopeless. Divide and conquer is not the optimal strategy with debt. When you focus your efforts, it's easier to take down debt.

So hit your debt with a snowstorm! What do you prefer, avalanches or snowballs?


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