Should You Snowball or Avalanche Your Debt?

If you’ve been a long-time reader of the NewLeaf Financial Guidance blog, you know that we’re not huge fans of debt. In fact, this time last year we put together a lengthy Debt Demolition series tackling everything you’d ever need to know about knocking out your debt and continuing to live debt free. Unfortunately, for many people, debt is a fact of life. It’s not fun, and nobody wants to deal with it, but it’s there – always looming in the background. For a lot of NewLeaf clients, this debt is student loans. For other clients, it’s a few outstanding credit card bills, auto loans, or a mortgage that they hadn’t thought all the way through before jumping into home ownership.

One question we almost always get is:

What’s the best way to pay off my debt?

Most people have heard of the debt snowball or the debt avalanche repayment plans. Each of these concepts has positive components, and the one you choose to go with is often heavily reliant on the types of debt you’re carrying and how much cash flow you have to pay them down quickly.

What’s the Debt Snowball?

The debt snowball is fairly straightforward. Essentially, you organize your debts in a list from smallest amount to largest amount, and you start paying them off. You pay the minimum balance on each of your debts except for the smallest loan. You throw everything extra that you’ve got in your debt repayment budget (or as a result of any financial windfalls you come across) until it’s paid off. Then, you take the amount you were paying toward your smallest debt each month, and put it toward the next debt on the list. Your debt repayment starts acting like a snowball. You start paying off the small ones first, and they slowly gain momentum until you’re paying down your debts with the biggest balance.

What’s the Debt Avalanche?

The debt avalanche is set up like the debt snowball, but instead of loan balance you’re focusing on the interest rate attached to each loan. With the debt avalanche, you want to organize your debts in a list from highest interest to lowest interest. You start by paying the debt with the highest interest rate, and pay the minimum balance on all of your other debt. Once your highest-interest-rate debt is paid, you move to the next on the list, and so on.

Which is Best? 

Mathematically, attacking your debt with the highest interest rate first is in your best interest. Over time, your interest rate will eat up a lot of your hard-earned money if you don’t knock out high-interest loans as quickly as possible. However, there are a few other things to consider:

  • Do you have any “emotional” debt or debt that, frankly, ticks you off? Sometimes paying down debt that’s tied to overwhelming feelings of guilt (like the jet ski you bought on credit) is worthwhile to pay off first to alleviate some of that pressure.
  • Do you have enough cash in savings to knock out one of your debts now? If you have one relatively small debt that’s been kicking around for a while, it might make the most sense to take it out now and free up the cash flow to put toward the next debt on your list.
  • Is consolidation or refinancing an option? Depending on the types of debt you’re carrying, you might find that refinancing or consolidating a few of your loans makes the most sense. This might earn you a better interest rate and make repayment easier (and cheaper). 

Embrace Your Debt-Related Guilt 

At NewLeaf Financial Guidance, we believe in celebrating your wins. Paying down even one debt deserves patting yourself on the back. But that doesn’t mean you should lose the emotional motivation you have for paying back your debt. The more relaxed you start to feel about your debt as you pay it off, the more likely you are to get off track with your repayment plan. Whenever you’re tempted to reward yourself by messing up your debt repayment schedule, or (even worse) taking on more debt – remind yourself of your big-picture financial goals. You want to live a life that’s debt free so that you can have a lifestyle you’ve always dreamed about – don’t forget that.

Get Organized

It’s easy to talk a big game when it comes to a debt snowball or debt avalanche repayment strategy. Unfortunately, so many people have so many different types of debt that it’s tough to know where to begin.

That’s where the NewLeaf Financial Guidance Debt Hit List comes in. This worksheet helps you organize your debt by amount and interest rate, and decide what order you want to pay everything off in. Ready to get started? Get your Debt Hit List now!