Q: What’s the best way to pay off my debt the quickest?
A: Either with a “snowball” or an “avalanche”!
Total debt reduction can be accelerated by making extra payments against your debt using a “snowball” or “avalanche” methodology.
Both methods require that you make the minimum payments on all your debts save one, either the debt with the smallest balance (the snowball approach) or with the highest interest rate (the avalanche method). And you must pay an additional amount each month against your debt.
To discuss how either method works, let’s assume you budget $100 each month as an extra payment as evidence of your commitment to reduce your debt quickly.
You’ve selected the first debt to pay off the quickest–one whose minimum payment is $75. You pay $175 each month on that debt until it’s paid off. Then, the next debt is identified, either the smallest balance or highest interest rate debt depending on the methodology you are pursuing. The $175 you had previously been paying on the first debt is now paid on the second targeted debt in addition to its minimum payment—let’s say, $60—for a total monthly payment of $235. Once the second debt is paid off, your budget has you paying $235 in addition to the minimum payment on the third debt. And the methodology is repeated until all debt is paid off.
Once your debt is paid off, you now have extra money (equal to the amount you were paying against debt) available in your household budget to put toward other goals!
The avalanche approach results in the least amount of interest paid. The snowball method has the number of debts being reduced the quickest (and perhaps maintaining the motivation to continue with debt reduction).
In the future, the best way to get rid of your debt is not to incur it in the first place!