There are many ways to pay off debt, but most notably are two very popular methods:
Both have their strengths. Neither is bad. I still say that the best method is the method that you are going to stick to!
This purpose of this article is to show how you can combine both the debt snowball and the debt avalanche into a hybrid method.
A Hybrid of The Debt Snowball and Avalanche
I couldn’t think of a catchy name. The Debt Snowlanch or the Debt Avalball just don’t roll off the tongue.
I personally followed the debt snowball method when paying off my debt. I was desperate to get financial peace and when I was steered towards Dave Ramsey back in 2014, I grabbed hold of it. It certainly worked as I made my final debt payment on December 29, 2017, and became debt-free for the first time in 23 years!
However, I learned about the debt avalanche method after getting out of debt and was intrigued.
Let me briefly explain the tenants of each method and then review the pros and cons of both before we talk about combining the two.
The Debt Snowball
It’s pretty simple really. First, you need to know the balance of all your consumer debts (not counting your mortgage) and write them down. Then you line them up from the one with the smallest balance to the one with the largest balance.
The plan is to pay the minimum balance on all but attack the smallest balance one first. The ways to do this are by driving down your expenses, working extra, and/or selling stuff. Basically, you do whatever you can to generate extra income to throw at the smallest debt.
Once you pay that one off, you roll that payment into the next biggest balanced debt. You’ll continue with this process until you get to the end of the line.
The idea is that as you pay off debts, your snowball gets bigger and bigger. So by the time you get to your biggest debt, you’ve got a rather large snowball.
Pros of the Debt Snowball
- It’s a process that works. Thousands of folks have paid off millions of dollars using this method (just check out all the Dave Ramsey debt-free screams).
- You can see all your debt balances.
- There are some fairly quick psychological wins by paying off your smallest debts first.
- By the time you get to your largest debt, your snowball should be BIG.
Cons of the Debt Snowball
There really is only one glaring con of the debt snowball method. And that is it ignores interest rates and hence may not be the most mathematically optimal method.
The Debt Avalanche
So the debt avalanche is similar in that you write down all your consumer debts (except your mortgage) and their balances. However, this time you also write down the interest rate associated with each debt.
You line them up from highest interest rate to smallest interest rate. Like the debt snowball method, you pay the minimum balance on all but attack the one with the largest interest rate first.
Of course, as you pay off a debt, you roll that payment into the next debt.
Pros of the Debt Avalanche
- It’s mathematically optimal.
- You can see all of your debt balances.
- Certainly, this method will work.
- As you pay off your debts, you gain an avalanche momentum.
Cons of the Debt Avalanche
Like the debt snowball, there is really only one major con, in my opinion. And that is if your highest interest rate debt is your biggest balance debt. If that is the case, it will take some time to get momentum. My fear is that many may give up because they are not getting the psychological win of paying some little ones off.
Never fear we can take the positives of both and combine them into a hybrid. Firstly, I’d like to give credit where credit is due. When I did my ChooseFI interview Brad asked me to explain the debt snowball method and how I did it.
I did and I also went onto explaining how I learned about the debt avalanche method after I got out of debt.
Jonathan chimed in and expressed that he has started to blend the two in his mind. I simply LOVED what he had to say about it so this is where the idea for this post came from. I recommend you listen to that podcast first to whet your appetite and then come back here for my breakdown.
So you still want to start with writing down the balances of all your consumer debts and like the avalanche include their interest rates.
Do you have some small balanced debts? For example things with a balance under $1,000. If the answer is yes, I still want you to focus on cleaning these up first.
Sidebar: if you happen to have any payday loans which have extremely high-interest rates or you owe the IRS money, you are going to need to focus on these first. Both of these types of debt trump all others in order of precedence so place them at the front of the line.
You will pay the minimum on all (if possible and if not, see this article about contacting your creditors).
Then you will attack those small ones first.
Take this next bit of advice seriously! Find any way you can to throw extra money at them:
- Get on a zero-based budget
- Work overtime
- Get a second part-time job
- Cut the cord with cable
- Change cell phone carriers to an MVNO and save $
- Reduce your food budget by reducing when you go out to eat and begin meal prepping.
- Sell stuff
- Be a mindful spender
I want you to get some psychological wins early on because it helps builds confidence. Additionally, you’ll get some annoying little debts out of the way so you can focus on the bigger ones strategically.
Once you’ve paid off the little ones ($1,000 and under) and are starting to believe this is really possible, let’s sit down and make a plan for your bigger ones.
Look at your remaining debts and focus on the interest rate. Now that we are dealing with higher balance debts, $1,000 or more, the interest rate matters more.
Line them up highest interest rate to smallest interest rate.
Similar to your first step, you are going to pay the minimum payment on all debts, but attack the ones with the largest interest rates first.
This way you’ll get a little combination of a psychological as well as a mathematical win on paying down your debts.
The most important thing here is to actually pay off your debts. If you have a preference to use one method over the other, go for it!
By combining the two, you’ll get the pros of both methods and with larger balance debts, interest really does matter.
As I mentioned I used the debt snowball because it was what I was taught it totally worked. However, looking back I realize that my smallest debts were also my highest interest debts so it wouldn’t have mattered.
Alright, is there anyone out there who used a hybrid of the two to pay down their debts? If so I’d love to hear from you.