There are two primary ways to tackle debt: from highest to lowest balance or from highest to lowest interest rate. These are better known as the “snowball” and “avalanche” methods. Either one will help you get your debt under control, but both require a plan to start.
The snowball method has gotten the most press as a simple but effective way to eliminate debt one piece at a time. It works like this:
- Start by making the minimum payments on all of your debt each month
- Take any surplus income you have and use it to pay extra principal on your smallest piece of debt
- Once that first small piece of debt is paid off, take a moment to celebrate and then use both your surplus income and the minimum payment you were making on that first piece of debt to pay extra principal on the second smallest piece of debt
- Once the second smallest piece of debt is paid off, take your surplus income and the minimum payments you were making on both your smallest and second smallest pieces of debt and use all three to pay extra principal on your third smallest piece of debt
- Continue this process until you are debt free
The biggest benefit of going with the snowball method is that you get nice early wins to celebrate and encourage further progress. The downside is that you could end up prioritizing paying down low cost debt before higher cost debt. This would extend the time it takes for you to become debt-free and cost you more in interest payments.
The avalanche method solves for that at the expense of some of those early wins. It works the exact same way as the snowball method, but you prioritize interest rates over balances. So you focus on the highest interest rate first until it’s paid down and then the next highest interest rate and so on. You end up paying less in interest this way and all else equal become debt-free a little bit faster.