Wondering which debt to pay off first? Our strategic guide explores the Snowball and Avalanche methods, helping you prioritize and eliminate your debts efficiently. Discover the best approach for your financial situation and take the first step toward financial freedom.
“Which debt should I pay first?” It’s a common question for people on the path to financial freedom. Credit card debt, student loans, car loans—the list goes on and on.
If you’re like many people, you may find yourself juggling multiple debts and wondering how to manage them effectively. This guide will help you decide which debt to tackle first by providing clear strategies to save money and reduce stress.
Before you can decide which debt to pay first, you need a full picture of your financial obligations. Take note of the balances, interest rates, and terms of each of your loans. Then, document these details in a single location like a spreadsheet or a personal finance app. This overview will help you make an educated decision about your debt repayment strategy as you execute on your 50/30/30 budget.
There are a few different ways to decide which debt to pay first, but most strategies fall into one of two categories—the Snowball Method or the Avalanche Method. In both strategies, you pay down one account at a time rather than spreading payments across multiple loans. However, the account you focus on depends on which method you choose.
What is the Snowball Method?
Using the Snowball Method, your focus is on the debt with the lowest balance. Instead of spreading additional payments across your debt, you devote all your extra money towards paying down your smallest balance first. Once that debt is paid off, you move to the next smallest balance, and so on. The idea is that by eliminating smaller debts quickly, you get a psychological boost from these "wins," keeping you motivated to continue paying off your debts.
Who is the Snowball Method best for?
The Snowball Method is ideal for those who thrive on small victories to stay motivated. If seeing quick progress and crossing debts off your list keeps you inspired, this method can be particularly effective. It’s also a great approach if you have multiple small debts that are manageable but feel overwhelming when looked at collectively. By knocking out these smaller debts first, you gain momentum and confidence, making the larger debts seem more achievable.
What is the Avalanche Method?
The Avalanche Method targets your debt by interest rate. The loan with the highest interest rate is your first target. Once you’ve paid off that loan, you focus on the loan with the next highest interest rate, and so forth. Because you’re paying off your highest interest rate debt first, you end up paying less in interest over time, which can save you a significant amount of money in the long run and enable you to contribute to a Roth or Traditional IRA sooner.
Who is the Avalanche Method Best For?
The Avalanche Method is best for those who are more mathematically inclined and focused on the long-term financial impact of their debt. If you’re motivated by the idea of saving money on interest and reducing the overall cost of your debt, this method will appeal to you. It requires patience and discipline, as it might take longer to see the first debt disappear, but the financial benefits are significant. This method is particularly effective if you have large balances with high-interest rates that are costing you a lot in interest payments each month.
Although these methods involve focusing on a single account at a time, don’t forget about the minimum payments on your other balances. Not paying those minimums can lead to hefty penalties and additional interest, effectively canceling out any progress you make otherwise.
In the end, the order in which you pay off your debt is largely a personal decision. If you need the dopamine hit of a zeroed-out balance to keep you motivated, the Snowball Method might be best for you. If you’re focused on getting out of debt as quickly and cheaply as possible, the Avalanche Method is likely your best bet.
Most importantly, don’t let feelings of overwhelm stop you in your tracks. Any plan for your debt, even if it’s not perfect, is better than no plan at all. Choose a method that aligns with your personality and financial goals, and stick with it. Remember, the journey to financial freedom is a marathon, not a sprint.
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