If you’re just starting (or are thinking of starting) your debt payoff journey, you might be wondering in what order you should be paying off your loans. The two most common methods in determining that order are called Snowball and Avalanche.
I used a combination of both when I was paying off debt and recommend that you choose whatever method will help keep you on track and eventually lead you to debt freedom.
Below is a graphic I made showing an example of loans and the order in which they would be paid off according to each method:
With this method, you list your debts based on interest rates going from largest to smallest. You start paying off the loan with the largest interest rate first and work your way down the list from there. Logically, this makes sense because you’re getting rid of the debt that is costing you the most in interest first. But, it does have its cons if you need small wins in the beginning to motivate you to keep going.
Because you are tackling the loans with the highest interest rate first, they will be around for a shorter period of time which means you’ll end up paying less interest in the long run.
In some cases, the largest loan will also have the largest interest rate and is going to take a long time to pay off. This can cause you to lose momentum since you feel like you’re not making much progress.
With the snowball method, you list your debts from smallest to largest and start tackling your smallest one first. You pay minimum payments on all your loans except the smallest one. Then you throw any extra cash you have at this one until you eliminate it. Because you are starting with the smallest loans, you will start getting rid of those pretty quickly which will encourage you to keep going.
You feel a sense of accomplishment early on because you start eliminating your small loans pretty quickly. This is the main reason Dave Ramsey suggests using this method. The small wins at the beginning of your journey give you a taste of success and the desire to keep throwing money at debt.
If your largest loan is also the one with the largest interest rate, you’ll end up paying it off last. This means that you will end up paying more interest in the end.
The method I used to get out of debt
When I was paying off my debt, I stuck to the Snowball Method the majority of the time. I would get really excited to see those small debts get knocked out. There were some instances where I had loans that were really close to each other in amounts owed, so I paid off whichever one had the highest interest rate first.
I recommend using the Snowball method because it’s encouraging to get those small debts done with in the beginning. If you decide to use the Avalanche method and start paying off loans with the high-interest rate first, make sure you find ways to stay focused and remember your end goal.