How to pay off debt

Debt Snowball vs Debt Avalanche

There are several ways to start your journey to paying down debt. In this post we will review the most common ways people use to successfully pay down debt.

Debt Snowball

List all of your consumer debts by order of balance lowest to highest regardless of interest rate.

Pay minimum payments on all debts and extra principal on your smallest debt. Once your smallest debt is paid off, use the minimum payment and extra you were paying on the first debt and start applying it to the second debt on your list. Once your second debt is paid off use the money you were applying to your second debt to the third debt on your list and so on until all your debt is paid.

Order	Debt	Loan Balance	Interest Rate
1	Credit Card	$3,000	19.0%
2	Creadit Card	$8,000	22.0%
3	Personal Loan	$11,000	8.0%
4	Car Loan	$29,000	3.5%
5	Student Loan	$45,000	4.5%

This process works well for many people as it a quick way to gain progress and attack your debts. This is the process that Dave Ramsey promotes as the quickest path to wealth.

Debt Avalanche

List all of your consumer debts by order of interest rate highest to lowest regardless of balance.

Pay minimum payments on all debts and extra principal on your debt with the highest interest rate. Once your first debt is paid off, use the minimum payment and extra you were paying on the first debt and start applying it to the second debt on your list. Once your second debt is paid off use the money you were applying to your second debt to the third debt on your list an so on until all your debt is paid.

Order	Debt	Loan Balance	Interest Rate
1	Credit Card	$8,000	22.0%
2	Credit Card	$3,000	19.0%
3	Personal Loan	$11,000	8.0%
4	Student Loan	45,000	4.5%
5	Car Loan	29,000	3.5%

The debt avalanche saves you interest paid on your debt over the long term but may not give you the quick gains and momentum like the debt snowball.

Combination

List your debts in any order you choose. Let us assume you have a personal loan to a family member that isn’t the smallest debt nor the debt with the highest interest rate. But this loan causes tension in the family. List and attack that debt first!

Order	Debt	Loan Balance	Interest Rate
1	Personal Loan	$11,000	8.0%
2	Credit Card	$3,000	19.0%
3	Credit Card	$8,000	22.0%
4	Car Loan	$29,000	3.5%
5	Student Loan	$45,000	4.5%

Whether you choose the debt snowball or the debt avalanche – the most important factor is to be intentional with your money - be focused and intentional. You did not create all the debt at once and it will time to eliminate your debt.

Make sure the extra payments are applied to the principal balance.

Once all of your debt is paid, excluding your mortgage, now you can use that money to build your emergency fund! It is recommended to have 3-6 months of expenses in your emergency fund.