Paying off debt seems overwhelming. I should know; I was once $40,000 in debt. But when you have an actionable, realistic strategy for paying down your debt, it makes it a lot easier.
You may have heard people talk about the debt snowball method, but that actually isn’t the most effective approach to paying down debt. Today, I’m going to teach you our step-by-step, stress-busting method for effectively paying down debt: our signature intelligent snowball method.
What is the debt snowball method?
The debt snowball method is a debt repayment strategy where you focus on paying off your smallest debt first, regardless of interest rate, while making minimum payments on the rest. Once the smallest debt is gone, you roll that payment into the next smallest debt. You know, like a snowball — you start off with a little clump of snow, then you pat in more and more and soon enough you have a whole snowman.
This is a method that’s recommended by a lot of financial experts, like Dave Ramsey, as being the fastest way to pay down debt. And there is a psychological advantage to it: being able to get a quick win keeps you motivated to continue making progress toward financial freedom.
But it isn’t the most effective way to pay down debt. I’m going to explain our next-level system for paying down debt in a second, but first, let me talk about another debt pay off method.
How does the debt snowball method work?
Does debt snowball work for paying off debt?
The snowball method doesn’t take the cost of your debt (aka the interest rate you are paying) into account at all. It focuses entirely on the lump sum.
The problem is that interest ends up making up a large percentage of your total debt. If you have a debt with a huge interest rate further down your list, that could end up costing a LOT more than your other debts - meaning you pay more and it takes you longer to get out of debt, which delays you from starting investing.
We always recommend paying off high-interest rate debt – meaning debt with an interest rate of 7% or more – before you start investing because otherwise your debt will cost you more than you can make by investing.
Learn our tried-and-true roadmap for building wealth!
So, that’s why the snowball method falls short.
What is the debt avalanche method?
The debt avalanche method is a debt repayment strategy where you focus on paying off debts with the highest interest rate first, while making minimum payments on the rest. Once the highest-interest debt is paid off, you move to the next highest, and so on.
.png)
How does the debt avalanche method work?
- List your debts from highest to lowest interest rate.
- Pay the minimum on all debts except the one with the highest rate.
- Put extra money toward the highest-interest debt until it’s gone.
- Repeat the process for the next highest-interest debt.
Does debt avalanche work for paying off debt?
The downside of the avalanche method is that since you're focusing on high-interest debts first, they might also have larger balances, meaning it could take a while before you fully pay off your first debt. This can be discouraging.
If you’re emotionally overwhelmed by multiple debts, the avalanche method might feel slow and frustrating.
How the intelligent snowball method works
The snowball method isn’t completely wrong and neither is the avalanche method; they're just slightly off-mark. What I suggest using instead is called the intelligent snowball method.
Here's how it works...
1) List out all of your debts — amount owed and the interest rate – in order from smallest to largest
Your spreadsheet may look something like this:
Now, just like the snowball method, you’re going to…
2) Pay down your smallest debt first
That means that every month, you pay the minimum amount on all of your debts, but you pay anything else you can spare on the smallest debt.
Gradually, you’ll pay down that one completely.
Congratulations! You’ve paid down your first debt!
3) Celebrate every victory
…in a way that doesn’t cost too much money, of course. Rewarding yourself will give yourself a little encouragement and make it mentally easier to continue paying down your debt.
4) Pay off a debt with an interest rate of 5%+
With the usual snowball method, you’d pay down the second-smallest debt next…but with the intelligent snowball method, if you have a debt that has a much higher interest rate, you’ll pay that off first.
Now, you only need to worry about this if the APR is significantly higher; let’s say 5% or more.
That way, you’re building your confidence AND reduces the amount you’ll have to pay in interest, effectively lowering the amount you’ll pay overall and saving you a lot of money and getting you out of debt and into wealth building mode faster.
After that, you’ve paid those first two debts off…
5) Keep paying down debt from smallest to largest interest rate
Keep it up until you’re debt-free!
Not sure what to do next?
You might be thinking, “Cool, now I have a method for paying down debt…but how do I ensure I don't fall back into debt? Or actually start building wealth?”
If you’re serious about getting rid of debt and want a simple, proven system to start paying down debt for good, we have tips on how to take control of your finances and build wealth in our free class, Master Your Money! (Plus, Laurie-Anne shares the story of how she paid off $40,000 of debt! Don't miss it!)
A Weekly Sip of Our Best Advice
We respect your privacy. We'll use your info to send only what matters to you — content, products, opportunities. Unsubscribe anytime. See our Privacy Policy for details.
