There are two main strategies to tackle debt efficiently: the "avalanche method" and the "snowball method."
The one that works best for your situation comes down to what motivates you and what will make it easiest for you to stick to the plan.
Here’s how they work:
Method #1: The avalanche method prioritizes paying off your highest-interest debt first.
Under this strategy, you organize your debt by annual percentage rate (APR) and pay the minimum payment on everything but the balance with the highest interest rate. That allows you to aggressively pay down the debt with the highest APR to reduce the overall interest you pay overtime.
So, for example, if you’re carrying debt on a credit card at 20%, a personal loan at 12%, and student loans at 5%, you’d make minimum payments on your personal and student loans while putting extra money toward the credit card to pay it off first.
- Pro: Using the avalanche method cuts down on your interest payments and helps you get debt-free faster. Mathematically, it’s the optimal choice.
- Con: If you’re tackling a large balance early on, it can be easy to lose steam if you don’t feel like you’re making progress.
Method #2: The snowball method prioritizes paying off your smallest balance first.
Paying down the account with the smallest balance and making minimum payments on everything else rewards you with a psychological boost every time you pay off an account.
So, for example, if you owe $2,800 on one credit card, $4,200 on another, and $15,000 on a loan, you’d make minimum payments on the larger two accounts and throw extra money at the smallest balance to pay it off first.
- Pro: Stacking wins early on rewards you for consistency and can make sticking to your debt plan easier.
- Con: By prioritizing balance over interest rates, you might pay more in interest over time and take longer to become debt-free.
Avalanche or snowball? Which method should you choose to pay off debt?
Ultimately, the strategy you follow depends on your personality and behavior. If you need some early wins to build consistency, choose the snowball method. If you’re motivated by getting out of debt sooner and can stick to the plan, choose the avalanche method. If you’re not sure which works best with your overall financial plan, reach out to your financial advisor!
Investment Advisory Services offered through Trek Financial LLC., an (SEC) Registered Investment Advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. Trek 23-754