When we decided to start paying off our 147K in debt, we had no idea where or how. It was a lot like standing at the bottom of Mt. Everest prepping for a climb without equipment or any knowledge of how to climb. Seems pretty impossible right?
That’s exactly how we felt staring at this mountain of debt. How in the hell are we going to conquer this?? We had zero tools needed to make this happen. The first thing we decided we needed was education. In a situation like this, a strategy seems to be a good place to start. You aren’t going to just start running up the side of Mt. Everest without a plan. You’re sure to fail. A quick google search for debt payoff strategies will inevitably bring you to the most popular and highly discussed debt payoff strategy. The debt snowball! Dave Ramsey has made this very popular. You’ll also stumble across another popular debt payoff strategy, the debt avalanche. This method is popular with the FI (financial independence) community.
For those of you that aren’t familiar with these, I’ll explain in quick detail.
The Debt Snowball is a method in which you list out your debt in order of balance remaining. Once you have your debt listed out in order of balance remaining, you take the lowest balance and tackle that debt first. The psychology behind this is that it gives you a quick win, and gets you excited about taking a bite out of debt. You then take the monthly payment for that particular loan and add it to the extra payment for the next loan payoff. That’s how it starts to “snowball”.
The Debt Avalanche is a method in which you list out your debt in order of interest rate, and then start pounding away at the debt with the highest interest rate. This will save you the most money because you pay less in interest over time. The downside is that you don’t get the quick easy win that gives you that dopamine rush. Sometimes your highest interest loan is also your largest, so this method may take longer to get those wins.
Which method is best you ask? The short answer is whatever gets your liability balance to zero! It truthfully comes back to having enough self awareness to understand what’ll work for you. If you aren’t sure what’ll work for you, I’ll tell you what worked for us because we didn’t know what would when we started. We didn’t pick one. We picked BOTH!! Whaaaat?!! Yep! We did both. I’ll tell you the how and why.
We listed out our debt smallest to largest. We bought a 14″x14″ dry erase board to list our debt out. We did this for 2 reasons. First, we thought it would be easier to update as we go. Secondly, we knew we could use a spreadsheet, but it would be waaayyy more fun to erase and update things manually. It gave us a sense of accomplishment every time we wiped that number and put a smaller number up. Much more fun than a spreadsheet!
The debt snowball was our method of choice. We had a few small debts, and once we paid a loan off, we got a high and couldn’t wait to move on to the next. It truthfully didn’t take us long before we were addicted! Jessie and I are both very competitive, so we immediately turned it into an unhealthy competition of who could spend less so that we had more to throw at our debt come payday. She usually won by a long shot! That girl eats like a bird. I swear she can survive months on crackers and water. Not me!! I need pizza in my life! I even set this board right outside of our glass shower so I could stay conscious of our goals every time I showered.
Anyway, after we got through a few small debts, we knew our mindset had changed. We would never go back to a consumer driven life, so we switched to the Avalanche. When we started the debt snowball, it took almost a year before we switched. Things moved slowly. There were some days, we thought we’d never see real progress. Once we switched to the avalanche though, holy smokes did things take off! We were paying off debt so fast and freeing up large chucks of money for our next loan. Our snowball was now a full-blown AVALANCHE!!!
So I say, there’s no right or wrong in this. Use one or the other. Use both. Use any method that you know will get the balance to ZERO because that’s the goal. Get rid of it by any means necessary!