How do you prioritize and pay down debt?
Highest rate first? Lowest balance?
Avalanche or snowball?
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?
Call me at (703) 779-7410 and we'll set up a time to talk or set up a meeting on our website https://www.bdafinancial.com/schedule
We can sit down and do a debt analysis together and develop a strategy that fits your situation.