Which Debt Repayment Strategy Is Right For You?

Debt is something that the majority of people have during their lifetime yet rarely talk about. It’s not always sexy to talk about a debt repayment strategy even though someone could definitely learn from you, and your mistakes.

But despite not talking about debt, it’s still there and it’s not going away unless you take the proper steps to make it disappear. But what’s a good debt repayment strategy? And how do we know which one is best for us? In this article, we’ll be taking a look at the debt snowball method, the debt avalanche method, and figuring out which one is right for you.

The Debt Snowball

What Is It: The debt snowball method was originally made popular by personal finance expert Dave Ramsey. With this debt repayment method, you focus on your smaller debts first before you work on your bigger ones. The hope is that once you’ve paid off your smaller payment amounts, you’ll add that original payment amount to your next biggest debt amount which causes the debt payment to snowball.

How does it work: Line all of your debt up from smallest to largest and focus on paying off your smallest debt amount first. Once you’ve made the original minimum payment, see what else you can do to free up money to make a bigger payment for the next month. Once this debt is paid off, take that payment and apply it to your next biggest debt payment. So if you were paying $25 a month (smallest debt) and your next debt payment is $50, you’ll now be paying $75.

Pros: This debt repayment strategy allows you to gain momentum, inspiring you to pay down your debt! It’s easier to stay focused when you’re paying off smaller amounts. Small wins can keep you motivated for the long haul instead of just watching a larger loan slowly go away.

Cons: You’ll pay more in interest over time which may not save you money in the long run. Since the debt snowball method focuses on your smallest debt, not the debt with the highest interest rate, this debt repayment method isn’t always the best option financially. It might not make too much of a difference with a timeline but the money adds up over time.

The Debt Avalanche

What Is It: The debt avalan che method has you focusing on your APR rate, and not the amount of the debt at hand. You would gather all of your debts and make a list of them by the amount of interest you are being charged. The debt with the highest interest rate is the one you would focus on paying off first. This debt repayment strategy will save you money over time by prioritizing the highest interest rate.

How Does It Work: After paying the minimum amount on all of your debt repayment, start figuring out how you can put extra money towards your debt with the highest interest rate. So, say you owe $5,000 for your car and your bank is charging you a 17% interest rate but your credit card with a much smaller balance was being charged with a 9% interest rate, you’d pay off your car first.

Pros: Your debt would be paid off and you’ll have paid the least amount of money in interest and finance fees!

Cons: No quick wins means you might be more discouraged on your debt repayment journey. A small win that’s quick can definitely be more motivating.

How To Pay Off Debt Faster

You can always pay off your debt faster than you think. One of the best ways to pay more towards your debt is to cut down on your living expenses. There are so many nontraditional ways to cut down your housing costs as well as make your money stretch, even during times of inflation. Another great way to cut down on debt is to make extra income via a side hustle or a second job.

The right debt repayment plan for you doesn’t have to be complicated. Once you’ve decided which method of repayment is right for you, it’s go time. You’ve got this.