When we were getting out of debt, we used the Debt Snowball method because it focused on the behavior portion with our money. These are just some random numbers I am throwing together, but personal finance is most likely 91% behavior and only 9% math – or something like that. The point is, behavior is the reason you’re in debt; not the math.
However there isn’t only one way to do something in life, and this is why I felt it is important to share the other way to pay off debt…
The Debt Avalanche Method
The Debt Avalanche method is very similar to the Debt Snowball, however it’s focus is the math. To do the Debt Avalanche, you line up all of your debts from largest interest rate to smallest interest rate. The reason: to pay less interest while paying off your debt.
This is going to take extreme discipline on your part because you may not feel that initial win like you will with the Debt Snowball. Since we are paying off in the order of interest rate and not balance, there is a good chance you are going to be attacking a larger balance prior to attacking a smaller one. However, if you are disciplined and stick with it, you will pay less in interest than doing the Debt Snowball. Ready to get started?
List all of your debts (except the mortgage) from largest interest rate to smallest interest rate. Make the minimum payments on all of your debts on your list and then allocate every extra dollar you can find in your budget to the very top debt (the one with the largest interest rate).
You are going to ATTACK the top debt and get it out of your life forever! If it’s a larger balance, stay the course and attack, attack, attack. You’re disciplined which is why you are choosing the Debt Avalanche over the Debt Snowball. Next, add what you were paying from the smallest debt and roll that into the next one on your list. Every time you pay off a debt, your payment will slide into the next one down – sort of like an avalanche!
Your Debt Avalanche is going to continue to pick up more momentum and by the time you get to your last debt, you’ll be CRUSHING the one with the smallest interest rate with all the momentum you had from all your previous debts!
Are there Exceptions to the Debt Snowball Order?
Yes! Life would be boring if there wasn’t an exception, right?
Rule #1: Pay the IRS first
If you owe the IRS, move them up to the top of your Avalanche. You don’t want to delay paying these guys because they’ll start taking money out of your check before you even know it. Rule of thumb: IRS doesn’t negotiate (well), therefore just pay them off as quickly as possible.
Rule #2: If you owe money on a 401(k) loan, you cannot add extra payments to them.
The only way to pay these off is to pay the agreed upon payment each month or to write them a check for the entire balance. Plus, if you’re looking at the interest rate, you’re paying yourself back the interest which will end up putting this debt at the bottom of your avalanche. I recommend when you get to this debt, make minimum payments and start socking away money in a separate savings account until you have enough to pay it off in full. Are you ready to start attacking your Debt using the Debt Snowball method right now!? The answer is Yes! Click the Button below to get your own Debt Snowball Form 😉