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Paying off debt isn’t easy, especially if you’re trying to pay off several at once.
If you have several debts, having a clear structure in place for your repayments is important. This can help the process feel less overwhelming and can help you keep track of your progress with each debt.
There are two popular ways of paying off multiple debts, known as the ‘debt avalanche’ and the ‘debt snowball' methods.
Let’s take a look at each.
The debt avalanche method
The debt avalanche method involves paying:
- A monthly minimum payment towards each of your debts.
- Directing any remaining money towards paying off the highest interest rate (regardless of balance).
- Pros of the avalanche method:
It works out as the cheapest method as long as you stick with it. By prioritising a debt with a high interest rate over one where you're paying little to no interest, you'll pay less money over time. It can also be very efficient.
- Cons of the avalanche method:
It can be difficult to stay motivated if you have large debts. If you're trying to pay off a large balance (such as a student loan) with an equally large interest rate, it will be a while before you see results.
Without results, it's easy to lose motivation, and without motivation, it's easy to give up. If you do choose this method, we suggest creating ways to celebrate your progress and stay motivated.
The debt snowball method
The debt snowball method involves paying:
- A monthly minimum payment towards each of your debts.
- Directing any remaining money towards paying off the smallest debt (regardless of interest rates).
- Pros of the snowball method:
It can be a highly motivating and rewarding way to pay off your debts because you will make progress quickly. It can be mentally rewarding to pay off your debts and see your balances completely cleared, making you feel in control of your finances. You’ll likely feel more positive about tackling bigger debts.
- Cons of the snowball method:
You may end up paying more because of interest, although this may turn out to be marginal. Check your interest rates carefully before choosing this method.
Deciding which method is best for you
The best method for you will depend on your personality type as well as the size and interest rates of your debts.
Unbury.me is a great tool for visualising debt repayment plans. It shows US dollars though the numbers will turn out the same whatever the currency.
It will help you to compare the avalanche vs. snowball method and understand how much you are saving by using the avalanche method.
Since the main downside of the avalanche method is the feeling of not making any progress, you could combat this by regularly checking this tool and reminding yourself of how much money you are saving.
Ensure you have adequate income
It's important to note that both of these methods are for people who have an adequate income. You’ll need to have enough money each month to pay your debts and cover your monthly outgoings.
If paying more than your minimum payments means that you won't be able to get by each month, then stick to the monthly minimum while looking for ways to either increase your income or decrease your spending.
Making a budget will help you make changes to your spending, and choosing the right budgeting style for you can help you get the most bang for your buck.
You may wish to seek more specialist financial support from StepChange or Citizens Advice if you are struggling to meet your existing commitments.
What about mortgage payments?
Neither method should involve paying down your mortgage, so don't include this on your list. This is because mortgages are often much bigger than other kinds of debt and will take you years to pay off, so they should be handled separately.
Can I use a mixture of both methods?
You could combine the two methods to get the best of both worlds. To do this:
- Write down all your debts.
- Make a note of the APR (interest rate) for each.
- Create of priority order based on the size of the debt and the APR rate.
You might start by paying off a medium-sized balance which has a high interest rate before moving on to some small debts and then tackling the large ones.
Ready to get started?
Whichever method you choose to run with, the important thing is that you're paying off debt, and that's always a good thing!
Remember to review your plan and budget regularly to make sure that you're staying on top of things, and don't forget to congratulate yourself on your efforts.
Get started paying off your debts with Ophelos here, by inputting your 6-digit reference code.
