Carrying debt can be super stressful — not to mention expensive! From interest charges and finance fees to the penalties you face for making a late payment, you can find yourself paying *a lot* more than the amount you originally owed when it's all said and done.
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So what can you do about it??? If you're in a position to start tackling debt, there are tons of ways to pay it down, and two of the most popular strategies are the debt snowball and debt avalanche.
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The debt snowball method made it really simple for me to pay down multiple debts and become debt-free. And in case the debt snowball isn't quite right for you, you might prefer its sibling, the debt avalanche.
Both of these methods work best if you can find some extra money in your budget after your usual bills are paid to put toward payoff. If you're not quite there at the moment, it might help to look for some ways to cut down your expenses.
In a nutshell, the debt snowball method involves making minimum payments on all of your debts except the smallest one: You'll pay extra toward that debt and when it's paid off, you'll roll that extra money over to your next smallest debt and repeat until your debts are all gone.
To get your snowball started, make a list of all of your debts and rank them by amount from lowest to highest.
For this example, let's say you have three debts:
1. Medical bill on a payment plan: $1,000
2. Credit card: $1,500
3. Car loan: $5,000
Next, jot down your minimum monthly payment for each debt and add them up.
If your medical payment is $100 per month, your credit card's minimum payment is $60, and your car loan minimum is $150, then your total would be $310.
Now it's time to take a good, honest look at your budget and see how much you can afford to put toward paying off debt each month. To make real progress, this amount should be greater than the total of your minimum payments.
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Keeping our example going, let's say after looking at your budget you decide you can afford to put $400 per month toward eliminating debt. This gives you $90 on top of all of your minimum payments.
Side note: If you don't have a budget yet, you can whip up a quick spreadsheet showing all your income and expenses or try one of these easy-peasy, no-spreadsheet budgeting methods.
And here's where the magic happens: You're going to keep making minimum payments on all of your debts *except* for the smallest one. For that debt, you'll pay the minimum plus whatever extra cash you decided you can spare in the budgeting step.
So to start, you'll pay the minimums on your credit card and car loan, and pay $190 per month toward your medical bill until it's gone.
Once you've paid off the smallest debt, put the amount you were paying on it toward your next-smallest debt.
With your medical bill out of the way, you'll start paying $250 per month toward your credit card, while still paying the minimum on your car loan.
And when that debt is paid off, roll your snowball over to the next-smallest. By the time you reach your largest debt, you'll be putting your total debt budget toward paying it off.
This means in the end, you'd be putting $400 a month toward paying off your car.
The debt snowball method worked for me, but it might not always be the best choice for everyone.
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One thing that I really liked about using the debt snowball method was the motivational boost that I got from paying off debt after debt. And once I became debt-free, I started putting the same amount that I'd been spending each month on debt into my emergency fund. In our example, that's $400 a month you can start stashing away once your debt is gone. Since you're already used to not spending this amount, saving it instead of paying up can be pretty painless.
But the debt snowball method isn't perfect. For starters, credit card debt tends to come with much higher interest charges. So if you don't tackle it first, you'll actually spend more on paying it off. Which brings me to the debt avalanche method...
The debt avalanche method is almost exactly like the debt snowball; except instead of prioritizing your debts by amount, you'll tackle the one with the highest interest rate first.
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Similar to the snowball, you'll start your avalanche by making a list of your debts. But this time, instead of ranking them by amount, list the interest rate on each and rank them from highest to lowest.
Let's say you're working with those same three debts, but this time we're ~interested~ in interest. Here's how your list might look:
1. Credit card: 20% interest, $60 minimum
2. Car loan: 6% interest, $150 minimum
3. Medical bill: 0% interest, $100 minimum
And just like the debt snowball, you'll add up your minimum payments and look at your budget to see how much you can afford to put toward debt each month.
To keep things easy, let's say $400 again.
But this time, you'll tackle the debt with the highest interest rate first. I'm looking at you, credit card.
So you'll pay the minimum on your car and medical bill and put $150 (that's the minimum payment plus the extra $$ you budgeted for) toward your credit card debt.
And once that debt is paid off, it's time for the avalanche to wipe out your debt with the next-highest interest rate, and so on.
It can take a little longer to completely eliminate one of your debts with this method, BUT tackling high-interest debt first means that you'll end up paying less in the long run to get debt-free.
The debt avalanche method can be a powerful plan to knock out debt; but just like the debt snowball, it has positives and negatives.
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If, like in the example, you just have one debt with a high interest rate, then the avalanche method can certainly help you save money by focusing on paying that account off first.
But if you have several high-interest debts, you might be better off finding a way to pay a bit more than the minimum on all of them. Plus, if your highest-interest debt also happens to be your largest debt, you might get discouraged using the avalanche method as it will take longer for you to feel like you're making progress.
Whatever debt repayment method you choose is totally up to you. If spending less on interest charges sounds good, then the avalanche might suit you to a T. Or if you (like me!) need the extra motivation of seeing one of your debts disappear sooner, then the snowball could do the trick.
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BTW, you can always plug your numbers into this debt snowball calculator and this debt avalanche calculator from NerdWallet to see exactly how these plans would work for you.
And remember, no financial advice is one-size-fits-all. Maybe one (or a combo) of these methods will work for you or perhaps neither of them feels quite right. Always take your personal budget, circ*mstances, and needs into consideration to make a plan to tackle debt that makes sense for you.
Do you have a genius tip for getting rid of debt? Tell us all about it in the comments below!
And for more money tips and tricks, check out our other personal finance posts.
