How to Pay Off Debt

TL/DR

• Adulthood is super expensive and it’s easy to find ourselves in debt.
• There are 2 common strategies for paying down debt: the snowball method and the avalanche method.
• No matter what your strategy, always make your minimum debt payments on all debts.
• The snowball method involves paying off your smallest debts first and rolling the money that would go towards paid off debts into payments for the next smallest debt.
• With the avalanche method, you pay off your highest interest debts first.
• The snowball method is easier and more empowering, while the avalanche method will save you more money in the long run (all else equal).
• The best and cheapest strategy is the one you’ll stick with.
• Once you pay down debts, make a strategy for not getting back into debt by outlining long-term goals, budgeting, treating credit cards with care, and potentially getting a higher paying job.

In case you hadn’t noticed (JK, you’ve definitely noticed), adulthood is super expensive and has gotten much more so after this past year of inflation. After an unexpected car repair or medical bill (of which there seem to be a lot for me lately), I frequently end up mulling my grocery list for the week and deciding, “Black bean tacos and oatmeal it is!”

With money tight even for the essentials, paying off debt can sound even more insurmountable than usual. And the resurrection of student loan payments just adds insult to injury.

However, paying down debt is both hugely empowering and, with a little strategy, can potentially save you loads of money in interest payments. There are two popular strategies for debt payoff and I feel like they were developed by people who were way into skiing, because they are called the “Snowball Method” and the “Avalanche Method.”

The Snowball Method of Debt Payoff

With the Snowball Method, you pay the minimum on all of your debts (make sure to do this always, no matter the strategy!) However, you use any extra money you have to pay off your smallest debts first. Say you have $150 of debt on one credit card, $300 of debt on another credit card, $2,000 of medical bills, and a $10,000 car payment. With the snowball method, you’d pay off the $150 debt first, followed by the $300 debt, and so on.

Once you pay off a debt, the money that you would normally pay towards that debt each money will now go towards paying off the next smallest debt. Like a snowball that grows as it rolls down a hill (though I’ve only seen this happen in movies), you’ll have more and more excess money to throw at your debt payments as you pay off your smaller debts in turn.

There are a few advantages with this strategy. First, paying off debt is super empowering and it’s much faster and easier to pay off a small debt than a large one. The dopamine boost you’ll get from paying off that smaller debt will help motivate you to pay off those larger debts. Second, it’s easier to keep track of a smaller number of debts. If you can erase smaller debts quickly and just focus on the larger ones, it may help you feel less overwhelmed and discouraged by the whole process. Finally, the Snowball Method is arguably simpler than the Avalanche Method, which I’ll get to now.

The Avalanche Method of Debt Payoff

Once again, you should always pay the minimum on all your debts. That’s almost insultingly obvious and I know you would never skip a debt payment unless you had to or, you know, forgot. If you’ve ever had the latter happen, it might be worth setting up automatic payments to pay the minimum on your bills. But anyway, important to note that the Avalanche Method still implies paying the minimum on all debts.

Unlike the Snowball Method, however, any extra money goes towards paying down the highest interest debt. In the example above, let’s say the $300 credit card payment has the highest interest rate, followed by the $150 credit card payment, followed by the $10,000 car payment, and last the $2,000 medical bill. In this example, you’d pay off the $300 credit card payment first and then use the money that would go towards that payment to pay down the $150 credit card payment and so on.

The advantages of the Avalanche Method highlight the disadvantages of the Snowball Method. Specifically, the Avalanche Method will cost less in interest over time. If you pay less in interest, you’ll have more money to go to your debt payments and so you will hopefully be able to pay down your debt faster.

Which Method Is Right For You?

The obvious question then becomes, why would I choose the Snowball Method over the avalanche method if the Avalanche Method saves me money and leads to faster debt payoff? The answer comes down to psychology. It’s usually harder to get a first (or even second) win with the Avalanche Method when the first debt to pay off is often one of your larger payments. Plus, remember that the key behind these strategies is that you’re putting your excess money into debt payments, which is not super fun. If it takes you awhile to get a win and feel that satisfaction of paying off a debt, you may not be as encouraged to put your extra money to debt payments.

At the end of the day, you’ll get the most cost savings from the strategy that works for you and helps you stick to your plan. It’s kind of like working out. Yes, you’ll burn more calories by running 5 miles than walking 2 miles. However, if running 5 miles makes you miserable and you quit after a couple of attempts, you’ll burn way less calories and lose way less weight than if you walked an enjoyable 2 miles most days.

Avoid Going Back Into Debt

The key to these strategies working is also not getting in more debt. That may sound obvious, but when you suddenly have extra money because you’re no longer paying down your debts, it’s easy to treat yourself a little too extravagantly (I’m in favor of treating yourself, just not going into debt over it!) So it’s important to keep a few things in mind:

1. Outline your long-term financial goals so that when you’re tempted to spend money on a shopping spree for your already bursting closet, you can remind yourself of the exciting things you’re saving money for. See my post here on saving money for the short-, medium-, and long-run.
2. Credit card points are only valuable if you’re not in debt, interest payments far outweigh the value of points (otherwise how would credit card companies make so much money?!) Only use credit cards if you can reliably pay them off each month or for an emergency.
3. Consider maintaining a budget, at least until you get a clearer sense of how much you can spend each month without going into the red. See my advice here for starting a budget that will help you save money and still make you happy.
4. If there’s no way of meeting your savings goals and paying for necessities, it might be time to look for a new job, ask for a raise, or develop a side hustle.

And last but not least, give yourself grace. You’re not a bad person for being in debt and there are so many people who are in the same boat (if not a far leakier boat). Like I mentioned above, the best strategy to pay off debt is the one that works for you, so if that means paying just an extra $5 towards your debt each month or taking on the occasional dog sitting gig and putting all your dog sitting money towards extra debt payments, you do you.

And remember, I’m not a financial advisor, so make sure to consult a professional before making any changes to your finances.

Do you have any other strategies that have worked for you? Let me know in the comments. And if you enjoyed the article and feel like it might be helpful to others, please share, like, and/or comment.