Inside: It’s a battle as old as calculators and Dave Ramsey: which debt payoff method is best? The debt avalanche or the debt snowball? Find out what they are, how they work, and which one I’m using.
There’s a war that’s been raging since the dawn of calculators and Dave Ramsey.
On one side we have the nerds with glasses and pocket protectors. On the other side we have your Everyday American who just wants to get ahead.
It’s the Battle of the Debt Payoff Methods!
Take a seat, my friend. Today you’ll find out why people are so polarized with these two methods, how they work, and how you can pick a side to be on.
What is the debt avalanche method?
I’m not talking about the overwhelmed feeling you get when you look at how much debt you’re in (I’m stuck under an avalanche of gart damn debt).
Instead, the debt avalanche method is one way to pay off your debt faster. Here’s how it works:
- Create an ordered hit list of your debts, from highest-to-lowest interest rate
- Make extra debt payments towards your first debt on the hit list until it’s paid off
- Take that newly-liberated payment, and apply it to the next debt on the hit list
- When that debt’s paid off, take both payments and apply them to the third debt
- Repeat ad infinitum until all debts are paid off
- Burn all your loan statements in a celebratory bonfire and respond to all future email marketing offers for more loans with a big F U!
So, for us, here’s what it would look like:
- 26% – Personal loan
- 25% – Lindsay student loan 1
- 45% – Zach student loans 5 & 6
- 29% – Zach student loans 1 & 2
- 75% – Zach student loans 3 & 4
- 25% – Lindsay student loan 2
- 75% – Auto loan
We would pay off the personal loan first. Then, we’d take that payment and apply it to my first student loan until that was paid off. By the final loan—the auto loan—we’d be making a huge payment, since there’d be a total of nine other loan payments packed on top of the minimum payment.
What is the debt snowball method?
The debt snowball method works the exact same way, except for one thing: you order your debts from smallest balance to largest balance.
If we were using this method, here’s what it would look like for us:
- $600 – Zach student loan 5
- $1,603 – Auto loan
- $1,680 – Zach student loan 1
- $1,826 – Personal loan
- $5,500 – Zach student loan 3
- $7,330 – Zach student loan 4
- $8,043 – Zach student loan 2
- $12,014 – Zach student loan 6
- $24,064 – Lindsay student loan 2
- $29,229 – Lindsay student loan 1
We’d pay them off the same way. First goes Zach’s student loan 5 like a domino, then we take that payment and apply it to the auto loan, etc… By the time we’ve reached the last loan—my first student loan—we’d again be making a huge payment, with nine other loan payments piled up on top of it.
Which debt payoff method do people prefer?
The truth is that most people actually choose the debt snowball method, and it’s not hard to see why.
See that first loan on our debt snowball list, just $600? We can knock that one out faster than a loose tooth. Compare that to the one of the top loans on our debt avalanche list, my first student loan. It has a balance of $29,229 left on it. That sucker’s gonna take longer to knock out than Mike Tyson all hopped up on cocaine.
So, why bother with the debt avalanche method at all, then?
It turns out you can actually get out of debt sooner and pay less overall by choosing the debt avalanche method. The reason is because you summon ancient demons and make a sacrifice to the dark overlord because you focus on the most expensive debt—i.e., the highest-interest-rate debt first. This saves you more interest money in the long run, so you can instead pay more towards your debt. And voila: you get out of debt sooner.
Which debt payoff method are we using?
We’re actually going with the debt avalanche method, as tough as it’ll be to slay that second domino. $29,000?! Sheesh. We’re gonna have sooooooo many XP by the time we get done fighting that monster.
The thing that helped us choose this method was looking at the actual numbers. If you sign up for a free Undebt.it account, you can enter in your own debt details and find out:
- How long it’ll take you to get out of debt
- How much you’ll pay in interest
- How much sooner you can get out of debt by making extra payments
- Compare different debt payoff methods
See that awesome comparison above? By choosing the debt avalanche method, we’ll get out of debt one month sooner and save $1,163. I dunno about you, but for me, $1,163 can go a long way towards saving up for something spiffy. Like a kegging system for my homebrew setup.
Which method would you choose to pay off your debt, and why? Leave a comment below!