Welcome back to Part 2 of How To Destroy Debt Like It’s Your Job. In case you missed Part 1 of Destroying Your Debt, we talked about finding out about all of your debt and investigating why you got into debt in the first place. Now that you have those answers, we can move on to the next step in destroying your debt.
Two Main Methods of Destroying Debt
Today it seems there are two popular ways to tear your debt to pieces. The first method is called the Debt Snowball and the second method is called the Debt Avalanche. Why they both involve snow is beyond me but I guess the metaphor does work. I think there are more creative names you could come up with, but we’re not here to debate the names of the methods.
The Debt Snowball
The Debt Snowball is often considered the best way to pay off debt from a psychological standpoint. The logical people will try to dissuade you from using this method because you’ll pay a bit more using this method than if you used the Debt Avalanche, but you need to do what works best for you. So what is the Debt Snowball?
When you use the Debt Snowball method to destroy your debt, you need to arrange your loans by the balance owed on them from smallest balance to largest balance. Why? You’ll find out!
You’ll need to make the minimum payment on all of your debt payments. The key is what you do with all of the extra money you’ll be putting toward your debt to destroy it. The point of the Debt Snowball is to take all of that extra money (your Snowball) and put it toward paying off the loan with the smallest balance. This will result in you paying off one small piece very quickly and that will put a big win in your column.
It should also give you some great momentum to knock out your next smallest piece of debt. Now that your first piece of debt is paid off, you’ll continue putting all of the extra money toward your next smallest loan balance ALONG WITH the minimum payment from the debt you already paid off. This will increase the size of your snowball and allow you to pay off your next loan quicker!
The Debt Avalanche
As you might have figured out, the Debt Snowball is not the most financially ideal way to pay off debt. By paying off the smallest balance first, you won’t be paying any attention to interest rates which determines how fast your debt grows.
The Debt Avalanche fixes this problem by using your extra payments to pay off the highest interest rate loan first. It may take you longer to pay off your first loan, but you’ll be minimizing the interest payments on your debt as you pay it off and saving a bit of money in the process. This method generally works out better for logical people who don’t need the emotional early wins of the Debt Snowball method.
Your Debt Avalanche will get larger as you pay off each loan. Simply take the minimum payments of each loan you pay off and roll it into your next highest interest rate debt payment, just like the Debt Snowball.
The Key Debt Destruction
The key is to get your debt paid off. You can use either method, the Debt Snowball or the Debt Avalanche. Don’t like playing with snow? Call it something else, I don’t care. Pick whichever works for you. If neither of these methods work for you, make your own method! Just get that debt paid off.
Which debt payoff method do you prefer? I personally pick the Debt Avalanche method. Are you still paying off debt? We are!