If you’re staring down a mountain of student loan debt, you’ve likely heard of two different repayment strategies:
- The debt “snowball.”
- The debt “avalanche.”
The debt snowball repayment strategy means that you start by repaying your smallest debt first. This could be a low-balance credit card, your smallest student loan – basically, whatever debt you have that has the lowest balance left. You set all of your other debts to the lowest monthly payment, and focus all of your “extra” payments on your lowest-balance debt to knock it out. Once that debt is gone, you “snowball” the amount you were paying toward it every month into your next-largest debt.
Over the course of time, the process continues, and the debt “snowball” grows until you’re putting all of the monthly funds you’ve allocated for debt repayment toward your final, biggest loan.
A debt “avalanche” strategy focuses on interest rate – not on loan balance. You start by paying down the debt you’re carrying that has the largest interest rate. Then, once it’s paid off you “avalanche” the monthly payment into the next-biggest-interest-rate debt you’re carrying.
It can be tough to know which of these strategies is best for you – so, let’s explore the pros and cons of each.
The Logical Answer: Avalanche
Logically, the debt avalanche is the “best” debt repayment strategy. You’re knocking out high-interest debt first, which means you’re saving money over time. A lot of planners will recommend this strategy – because it looks great on paper.
Listen, I’m not knocking the avalanche strategy. If it works for you, that’s fantastic. Some people are super disciplined, and following the debt avalanche strategy makes the most sense to them.
But, in my experience, money is an emotional thing. Doing what looks best on paper doesn’t always work. Most people aren’t completely rational with their finances. They’re focused on how their money makes them feel – not the most “logical” way to get things done.
The Emotional Component: Snowball
The debt snowball strategy is what I typically recommend that people implement in their own finances. There’s an emotional component to paying off debt quickly. When you’re tackling small-balance debt, you’re able to knock a few debts out fairly quickly, then “snowball” those payments into the next debt – which speeds up the process.
There’s something really satisfying about seeing your small-balance debts disappear after a few months, or a few years, of focused repayment. I think of it almost as a “game-ifying” strategy. It’s you v. your debt, and when you knock out small-balance debt, you’re putting points on the board relatively quickly. Winning (whether those wins are big or small) boosts motivation no matter what area of your life you’re talking about, and money is no different.
A lot of my clients are highly educated, logical people. Many of them have tried the avalanche strategy before, and have noticed that it just didn’t feel right. That’s because throwing money at a high-balance, high-interest loan doesn’t feel like a win.
It just feels like you’re chipping away at an endless mountain, which can get overwhelming pretty quickly. Feeling overwhelmed often leads to feeling uninspired – which can lead to falling off the debt-repayment bandwagon. Then, before you know it, you’re paying the minimum balances on all of your debt, and feel like you can’t even see the light at the end of the tunnel anymore. The snowball strategy sidesteps this issue. You see progress being made right away, and are motivated to keep the hammer down.
Create a Custom Strategy That Inspires You
I’m not saying that you have to stick to the avalanche or the snowball strategy entirely. In fact, I think it works better if you create a custom strategy that inspires you to stick with and prioritize debt repayment. There are a few things that you can do outside of these strategies to feel like you’re “winning” debt repayment and stay on track:
- Knock out emotional debt first. Did you use a credit card for an expensive vacation that you ended up canceling – only to find out you couldn’t get it refunded? Are you tired of hearing your mother-in-law bring up your spouse’s Parent PLUS loans at every family holiday? If a debt makes you feel emotional, or you’re kicking yourself for spending the money, work on repaying it first. You’ll feel better, and get more satisfaction out of knocking out emotional debt than you would if you stuck to a snowball or avalanche strategy.
- Categorize your debt – and tackle specific categories first. You may have a mortgage and an auto loan, and several different student loans. Maybe you lump the auto loan and the mortgage together, and all of your student loans together – and decide you want to pay off student loans first. Categorizing your debt and paying back one category at a time can be helpful and keep you focused.
- Use the avalanche and snowball strategies for different kinds of debt that you’re carrying. Maybe you have several credit cards and a handful of student loans. For your high-interest credit cards that all have a similar balance, the debt avalanche may make more sense. When you look at your student loans that have a bunch of different balances and similar interest rates, you might take the snowball approach.
Don’t be afraid to create a strategy that helps you accomplish paying your debt and makes you feel good while you do it. Your finances are a tool to help you feel fulfilled – and that includes creating a method for repaying your debt.
Have questions? Want help? Contact us today! Our team would love to help you organize a strategy that meets your unique financial goals and needs.