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Welcome back to the Debt Free Challenge. Today we’re going to focus on determining your debt payment strategy. We’ll look at 2 of the most well known methods for clearing debt–the Debt Snowball and the Debt Avalanche. Both methods are structured to pay off debt smallest to largest, but the way the debt is prioritized is where they differ.

 

Debt Snowball

 

With the Debt Snowball, your debts are listed by amount, smallest to largest. You pay the minimum payment due on all but the smallest debt, and throw all your extra cash at that smallest debt. Once that debt is crossed off your list, you do the same with the next debt on the list, and so on until all the debt is paid. More information on the Debt Snowball is available here.

 

Debt Avalanche

 

With the Debt Avalanche, you list your debts by which has the highest interest rate, regardless of amount. All your extra cash is put towards the debt with the highest interest rate, while paying the minimum payments on the rest. Once the highest interest rate debt is paid, you move on to the next one on your list, and continue until all of the debt is paid. More information on the Debt Avalanche can be found here.

 

Which is better?

 

So, which is better? It depends…according to research, the Snowball has the psychological advantage of allowing you to cross items off your list a little faster since you’re starting with the smallest amount first. The Avalanche will save you the most money since you’re starting with the debt with the highest interest rate. This method really takes a good bit of discipline, since it will cost you more money in the long run if you miss a planned payment.

I ask again-which is better? I can’t answer that, since I’m not you. The one that works for you, the one you stick to, is the better of the 2 methods. If you’re not going to stick to your plan, it doesn’t matter which plan you choose.

 

Choosing your Debt Free Strategy

 

The time has come to determine how you are going to attack your debt. If you find one method is not working for you it’s OK to switch if you find your first choice isn’t working as you’d like. I don’t suggest flipping between the two. Once you’ve settled on your strategy you should stick with it for the long haul.

All of the posts thus far in the Debt Free Challenge have been laying the groundwork for what comes next. We’re ready to start writing your budget and get this debt free party off the ground. See you next time!

Be well and God Bless-until we meet again…

Sources:

Dave Ramsey

Nerd Wallet

Investopedia

 

Note-Any and all items contained in the Older Wiser Money Miser Debt Free Challenge are intended as a resource for informational purposes only and should not be construed as professional tax or investing advice.

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