Which debt do I pay off first?

Vawter Financial |
Categories
Education
Debt Reduction
Finance
money

There are two main strategies to tackle debt efficiently: the "avalanche method" and the "snowball method."

The one that works best for your situation comes down to what motivates you and what will make it easiest for you to stick to the plan.

Here's how they work:

Method #1: The avalanche method prioritizes paying off your highest-interest debt first.

Under this strategy, you organize your debt by annual percentage rate (APR) and pay the minimum payment on everything but the balance with the highest interest rate.

That allows you to aggressively pay down the debt with the highest APR to reduce the overall interest you pay over time.

So, for example, if you're carrying debt on a credit card at 20%, a personal loan at 12%, and student loans at 5%, you'd make minimum payments on your personal and student loans while putting extra money toward the credit card to pay it off first.

Pro: Using the avalanche method cuts down on your interest payments and helps you get debt-free faster. Mathematically, it's the optimal choice.

Con: If you're tackling a large balance early on, it can be easy to lose steam if you don't feel like you're making progress.

Method #2: The snowball method prioritizes paying off your smallest balance first.

Paying down the account with the smallest balance and making minimum payments on everything else rewards you with a psychological boost every time you pay off an account.

So, for example, if you owe $2,800 on one credit card, $4,200 on another, and $15,000 on a loan, you'd make minimum payments on the larger two accounts and throw extra money at the smallest balance to pay it off first.

Pro: Stacking wins early on rewards you for consistency and can make sticking to your debt plan easier.

Con: By prioritizing balance over interest rates, you might pay more in interest over time and take longer to become debt-free.

Avalanche or snowball? Which method should you choose to pay off debt?

Ultimately, the strategy you follow depends on your personality and behavior.

If you need some early wins to build consistency, choose the snowball method.

If you're motivated by getting out of debt sooner and can stick to the plan, choose the avalanche method.

Want help talking through debt options?

Click on our Contact Us or Schedule a Call buttons or call us at (614) 451-1002 and we'll set up a time to talk.

We can sit down and do a debt analysis together and develop a strategy that fits your situation.

The opinions expressed in our blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this blog is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.