Current Balance: $29,829.58
When I chat with people about how to pay off debt, they almost always end up falling into two different categories: Those who prefer the Avalanche Method and those who prefer the Snowball Method. If you’ve never heard of either you are likely a little confused so let me briefly explain the two methods:
Avalanche Method
The Avalanche Method is paying off your debt starting with the individual loan/balance with the highest interest rate first regardless of the principle balance amount. Think of a mountain with the highest interest rate at the top and the lowest at the bottom and your start working your way down. This is a method for people (like me) who want to pay the lowest amount of interest possible, and by paying off the highest interest rate balance first, you save money over time.
Snowball Method
The Snowball Method is paying off your debt by size of the individual loan/balance. You start with the lowest principle balance and work up to the largest principle balance. Think of the snowball effect and how a small snowball can get larger and larger as it rolls around in the snow. Typically, this is a method for people who need a little extra motivation and as they start paying off lower balances, because it motivates them to stay committed to paying off the higher balances. However, it also has other benefits as you’ll read below.
So, Which is Best?
To give the most attorney like answer I can: it depends. I’ve used both for different reasons. I prefer the Avalanche Method because I don’t like the thought of paying more interest, but I’ve also used the Snowball Method for lowering my minimum loan payments. One of the first student loans I paid off was my Federal Perkins loan. It was a $5,000 loan with a 5% interest rate and a $47.73 monthly payment. Although, I had loans with interest rates of 7.9% and 6.8%, when I had the remaining $3,500 to pay off the Perkins loan, I did it to lower my overall minimum payment by $47.73. This was the end of 2014 and I was worried about losing my job. I had a three month emergency fund (which you should strive to have in saving), but I wanted extra protection by lowering my total monthly expenses in case I lost my job. To me, that is one major benefit of the Snowball Method. If that lowest balance has a minimum payment of $15/month, once it’s paid off you can use that $15 towards another loan balance or building up your emergency fund.
Like almost anything, you need to find what works for you and your situation. It may be the Avalanche Method, it may be the Snowball Method, or it could be a combination of both. Whatever you decide, make a budget, make a plan and stick with it.
