Debt Payoff Methods

My Strategic Dollar Debt, Personal Finance, Student Loans 0 Comments

This post may contain affiliate links. We may be compensated if you choose to utilize a link on this page. All opinions are mine.

There are two popular methods of paying off debt – the Snowball and the Avalanche. Have you heard of these? Maybe you’re already deploying this type of strategy? Here’s a simple breakdown of each method. The pictures shown below were generated by unbury.me but all opinions are mine, as always.

Snowball vs. Avalanche

The Snowball method is paying off your debt in the order of the lowest total principal amount due. Whereas, the Avalanche method is paying off your debt in the order of highest interest rate.

Let’s look at an example. Bob (fake name 🙂 ) has the following debt amounts left as of today:

$25,000 – Student loans – 6.75% for 10 years

$9,350 – Car Loan – 4.25% for 5 years

$13,750 – Credit Card Debt – 13.55% Until paid off

With the Snowball method, you’d pay your debt off in this order:

  1.  $9,350 – Car Loan – 4.25%
  2. $13,750 – Credit Card Debt – 13.55%
  3. $25,000 – Student loans – 6.75%

With the Avalanche method, you’d pay your debt off in this order:

  1. $13,750 – Credit Card Debt – 13.55%
  2. $25,000 – Student loans – 6.75%
  3. $9,350 – Car Loan – 4.25%

The minimum payment based on the above terms is $497. Let’s say you have $1506 a month to pay off these debts, so you’ll be putting an extra $1009 towards your debt! Here’s what your debt situation would look like:

Snowball: You’ll pay the minimum payments on all loans except for the car loan, you’ll throw the extra $1009 towards that. Once you’ve paid off the car loan, you’ll throw the $1009 + car payment towards the credit card debt in addition to the minimum payment. And repeat.

Avalanche: You’ll again pay the minimum payments on all loans except for the credit card debt. You’ll throw the extra $1009 at the credit card in addition to the minimum payment. Once it’s paid off, you’ll throw the $1009 + minimum payment towards the student loans in additional to the student loan minimum payment.

Obviously, these are two very different ways of paying down your debt. How do you decide which method works best for you? There are reasons for choosing either method.

The idea behind the Snowball method is to make incremental progress and be able to see results faster. Based on the example above, paying down $9,350 car loan will be quicker than paying off the $13,750 in credit card debt or the $25,000 student loans. On the flip side, by paying off the highest interest rate first, you’ll always pay less interest with the Avalanche method. As you see in the pictures above, you’ll pay $1,180 less in interest with the Avalanche.

I personally have used the Snowball method, because I like to see the progress and the buildup of my payments quicker. BUT, the choice is yours.

-My Strategic Dollar

Leave a Reply

Your email address will not be published. Required fields are marked *