When you get serious about getting out of debt it’s good to have a plan of attack. Knowing the best way to eliminate your debts efficiently will help keep you motivated and focused. Two of the more popular methods of debt reduction are the “debt snowball” and the “debt avalanche”. Each has their pros and cons and different people will find themselves drawn to different techniques. Here’s a rundown on how they work.

The Debt Snowball
The debt snowball method is taught by Dave Ramsey and is fairly popular with a lot of people. The debt snowball works like this:

  1. List all your debts with the smallest balance on the top, and the biggest balance on the bottom.
  2. Pay the minimum amount on all your debts.
  3. All the leftover money should go towards the debt with the smallest balance first.
  4. When that smallest balance is eliminated you move on to the next smallest balance.
  5. Repeat until you’re out of debt.

The big appeal of this method is that it has a huge psychological boost as you see the number of people you owe money to decrease (comparatively) quickly. If you owe money to 11 different banks and you cut that number down to four in short order, you can’t help but feel like you’re making some progress.

The obvious downside to this method is that it doesn’t take interest rates into account, and you’ll often end up paying more in interest compared to the debt avalanche method.

The Debt Avalanche
The debt avalanche method is, on paper, the absolute best way to eliminate your debt as quickly and efficiently as possible. It works like this:

  1. List all your debts with the highest interest rate on the top, and the lowest interest rate on the bottom.
  2. Pay the minimum amount on all your debts.
  3. All the leftover money should go towards the debt with the highest interest rate.
  4. When that highest interest rate debt is eliminated you move on to the next highest interest rate.
  5. Repeat until you’re out of debt.

Mathematically this is the best way to get out of debt. Over time you will pay the least amount of interest with this technique.

Critics of the debt avalanche say it doesn’t factor in human nature and the psychology of debt reduction. If you owe $10,000 on your high interest debt, and $250 on some lower rate cards, you will be paying exclusively on that $10,000 balance for some time. Many people will feel like they aren’t making any real progress, get frustrated, and give up. Some people think the debt avalanche appeals to more analytical people, while the debt snowball is more appealing to those who are more emotional in their decision-making.

Which technique is best?
Again, on paper, the debt avalanche is the best way to go. But I think it’s silly to ignore the emotional aspect of personal finance because it is often emotional reasons that got us into debt in the first place. So as corny as it may sound the best technique is the one that works best for you. There’s no reason you can’t combine them, or switch back and forth a little bit too. I paid off two small debts I had before switching back to the debt avalanche for the remaining three. I felt good about clearing those two small things off my plate and the psychological effect of making that progress really motivated me to stay on track.

Whatever you choose it’s more important to start now, stop spending money you don’t have, and get out of debt.

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