Like budgeting the right way, the only right way to pay off your debt is the way that is best for you.
Your debt payoff plan is not going to look like your next door neighbor’s plan, your best friend’s plan, or even my personal plan.
Some people may only want to pay off their unnecessary debt. Others may want to pay off all debt—period—even if it’s for an income-generating asset like a rental property.
Personal situations are just way too numerous to give a one-size-fits-all, restrictive, typical rule-based approach to debt.
It has to be personal, just like the rest of personal finance.
That’s why it can be a great investment to have a financial coach like me run through your options with you.
While setting up your debt payoff plan, there are four main strategies you can use to pay off your debt.
The four methods are the:
- Debt Snowball Method (lowest balance first)
- Debt Avalanche Method (highest interest rate first)
- Highest Monthly Impact Method (usually the highest monthly payment first)
- Debt Consolidation Method
There are pros and cons to each of these methods.
Which one is best for you will depend on your situation and personality.
So let’s go over in detail what each method consists of, who they’re good for, and what to watch out for when you are deciding on which one to use.
Debt Snowball Method
The Debt Snowball Method is used to pay off your debt from the smallest balance to the largest balance.
You start with the debt that has the smallest total balance and then move on to the next smallest balance after the first is paid off.
After the second smallest balance is paid off, you move onto the third smallest balance, and keep going until all your debt is paid off.
You also “snowball” your payments by adding the money you were using for each debt payment to the next debt’s total payment.
The Debt Snowball Method takes human psychology into consideration and gives you small wins at the start so you can stay motivated paying off your debt.
It gives you momentum like a snowball!
You don’t pay attention to Interest rates when using the debt snowball method. It isn’t designed to minimize how much interest you pay in the long run.
Who Should Try This Method
The Debt Snowball Method is perfect for those of you who don’t have much money to put toward your debt.
As you pay down your smaller debts—something that will be quicker than starting with a larger debt—you will naturally start to have more money for each subsequent debt.
This will help keep your momentum going and encourage you to stick with your debt payoff plan.
It’s also perfect if you want those small wins to help keep you motivated. This is a huge part of being human so this may be the best method for you.
What to Watch Out For
Since the Debt Snowball Method doesn’t account for interest rates, you may end up paying more in interest in the long run.
If that is something that really bothers you, the Debt Snowball Method might not be the best choice.
The Debt Snowball Method also has the potential to be a “set it and forget it” method, which is great for some people but not so great for others.
If you need to see—or even feel—your progress, be sure to watch your balances dwindle as you pay them down.
And if you’re the type of person who is motivated by seeing a lot of progress in a short amount of time, the Debt Snowball Method may not give you that satisfaction.
Since you’re starting with smaller balances first, your total debt amount is not going to drop very quickly.
To get around this, pay attention to the total debts (i.e. 3 credit cards, 1 car loan, etc.) you have to pay off rather than the total debt balance you have to pay off.
That way you can check each debt off the list from the start and see great progress instead of watching your total balance slowly go down at the beginning.
Debt Avalanche Method
The Debt Avalanche Method starts with paying off the balance with the highest interest rate first. Payment size and total balance don’t matter in this method.
The Debt Avalanche Method aims to help you pay the least amount of interest overall in your debt payoff journey.
For this method, you’ll want to list out your debts from the highest interest rate to the lowest and then start paying them down in that order.
If you’re really into math, you could take this a step further and figure out exactly how much interest you will be paying on each of your debts using a debt payoff calculator or spreadsheet.
Who Should Try This Method
If you figured out how much interest you’ll be paying over the life of your debt and it’s just killing you, try this method out.
If you are really into math and numbers, the Debt Avalanche Method is a great option for you as well.
For example, you might run the numbers and figure out that your debt with the highest balance but only the third highest interest rate is actually the debt that will require the most interest payments.
You could move that one to the top of the list if you wanted.
The Debt Avalanche Method also may get you out of debt sooner because less interest is accumulating as you pay off your debt—although this will depend on your individual debt situation.
If you want to pay the least amount of interest while potentially getting out of debt quicker, the Debt Avalanche Method may be just the ticket.
What to Watch Out For
Even though the Debt Avalanche Method could get you out of debt sooner, you may not see a lot of progress right away.
Although traditionally longer terms have lower interest rates (i.e. car loans, mortgages, etc), this isn’t always the case.
You could have a car loan with a high interest rate and a couple of interest-free credit cards.
This means that some of your higher interest rate debts may have a higher balance, and that means it’ll take you a bit longer to see progress.
That also means if you are the type of person that is motivated by achieving something—like me—the debt avalanche method may not be for you since you may not be paying off low balances first.
To get around this, rely on automation to stick to the plan so it’s easier to keep going if you are demotivated.
Highest Monthly Impact Method
The Highest Monthly Impact Method is a method I don’t see talked about in the personal finance world.
This method looks at the dollar amount of your monthly debt payments to determine your payoff order.
Sometimes it’s best to look at what you’ll be saving on a monthly basis, rather than what you will save in interest or focusing on the balances.
To get started with this method, list your unnecessary debt in the order from the highest monthly payment to the lowest monthly payment.
You can also choose to have your “Highest Monthly Impact” be paying off two smaller debts in quick succession that would add up to a good amount of savings each month.
Who Should Try This Method?
This method can be useful if you are living paycheck-to-paycheck or you’re having trouble making ends meet.
Let’s say you’re paying $84 a month to pay off a no-interest, $1,000 balance in 12-month before you’re charged interest.
Paying that off first and freeing up $84 every month may give you some much-needed breathing room.
You could switch it around and pay off something with a higher payment even if it has a higher balance or a lower payment. The choice is up to you in how you want to work it with your budget.
I’ve paid down my debt this way before and really recommend it for people that are struggling to find some breathing room in their budget.
This method is also great if you really want to free up some monthly income regardless if you’re living paycheck-to-paycheck or not.
Sometimes, it’s just nice to have that extra cash flow every month.
It can also help you feel a bit more comfortable if there is a loss of income. You have that extra monthly cushion if you need it.
But for some of you, paying off a credit card costing you $150 a month means no longer making a choice between groceries and a haircut you desperately need.
What to Watch Out For
Paying off the highest monthly payment first may not always make sense. It is strictly a matter of comfort.
To get around this, you could re-evaluate your payoff order after paying off the first balance.
It may make sense to go for the highest monthly impact for the first debt just to give yourself some breathing room, and then switch to a more traditional debt snowball or avalanche after that.
You also should watch out for how long it will take you to pay off some of your higher balances.
Term lengths, total balance, and how each Individual company calculates minimum payments can all affect how much your monthly payment will be.
Be sure to watch out for this.
As I mentioned above, it may actually make more sense to pay off two lower balanced debts to get a bigger impact on your monthly payments than paying off one with a higher balance.
Debt Consolidation Method
Debt consolidation is the method of rolling all your higher-interest debts like credit cards or payday loans into one low-interest loan so you only have one payment to make.
This can lower the total amount of interest you’re paying and make it easier to keep track of your debt since you’re only managing one debt.
The two main options for consolidation loans are home equity loans and an unsecured loan.
Unsecured loans generally have a lower interest rate than a credit card would, but a home equity loan would most likely have the lowest interest rate.
Who Should Try This Method
If you are drowning in high-interest debt, it may make sense for you to consolidate your debt into one low-interest loan.
The Debt Consolidation Method can help lower your monthly payment as well as the amount of interest you pay overall.
You can also combine this with other methods as well. You have the option of consolidating only high-interest credit cards and keeping any interest-fee or low-interest debts as individual debts.
Then you can choose a different method to plan on paying it all off.
Definitely do what’s best for you.
What to Watch Out For
Debt consolidation is definitely not for everyone. If you use a home equity loan or line of credit to consolidate your debt, you’ve essentially put your home up as collateral.
That means if you’re not able to pay the loan, there is a chance you could lose your home.
Generally, consolidating your debt will give you a lower total monthly payment than all your separate payments combined.
However, since you have one larger loan, you won’t have the option of paying off a singular debt to lower your overall monthly payments should your financial life get a little tough.
That means you’re stuck with a larger loan payment until the entire debt is paid off.
When paying off your debt, you have the option of combining any or all of these methods.
That can give you greater flexibility, greater power, or both!
It could be that your highest interest debt is also your highest monthly payment because of a credit card you ran up a few years ago.
It may make sense to pay it off first even if you’ve been eyeing the Debt Snowball Method.
Or you may have purchased something on an interest-free credit card that if you don’t pay off during the promotional period you get charged an entire year’s worth of interest up from.
This debt could be your lowest balance, highest interest, and higher monthly payment. You’d effectively be combining most of these methods by placing that debt at the front of the pack.
And again, you can always consolidate some debt instead of all if you think that will save you interest as well as make it easier to pay things off than if you consolidated everything.
Run the numbers, and then do what makes sense for your personal situation.
What to Watch Out For When Combining Methods
The main issue with combining methods is that it can take up more time.
Sometimes it’s best to just pick one and start and re-evaluate later rather than
Another issue is it can take more work. Picking one and sticking to it allows you to implement the plan and go.
Try combining methods if you want to get into the nitty-gritty of your debt payoff, but keep in mind it may be best just to pick a method and utilize it.
For these reasons, combining methods is definitely not for everyone.
Always Snowball Your Payments
The last tip I want to give you is to always snowball your payments regardless.
The Debt Snowball Method incorporates this already, but it’s a good idea to snowball your payments regardless of what method you use.
Snowballing your payments means taking the minimum payment from the current debt you’re paying off, plus the extra money you are using to pay it off, and using all of it toward the next debt after paying off your current debt.
Snowballing your payments will accelerate your debt payoff and decrease the time it takes you to pay off your debt.
Unless you need the extra breathing room, it makes sense to continue using that money to pay off your debt.
Since it’s already “gone,” you won’t miss it.
Paying off your debt is hard work. That’s why it’s so important to choose the method that is right for you.
And don’t feel tied down to a certain method. Just because some finance guru says it’s the “best method” doesn’t mean it’s going to be the right one for you.
In the past, I’ve switched methods as well.
For example, if you start with the Debt Snowball Method and it motivates you to do whatever you can to pay off your debt, you may feel like you want to minimize and accelerate even more by switching to the Debt Avalanche Method.
Now that you’ve taken a deep dive into each method, you can use my ultimate step-by-step guide to paying off your debt to create your own debt payoff plan.
And if you want some accountability, encouragement, and expert advice, I’d love to coach you personally.
Either way, I’m in your corner no matter where you are in your debt payoff journey.