Money Crashers: Best Way to Pay Off Debt

One problem I haven't had to deal with very much in my life is debt. Brian and I, unlike many of our generation, were lucky enough to get through school without student loans, and knowledgeable enough to avoid getting in over our heads with credit cards. We've never had any debts except our mortgage, and so we've never had to worry about which debt we should try to pay off first.

Many Americans, however, aren't so lucky. A 2015 Pew report shows that 80 percent of all Americans have some kind of debt, with a median total debt of nearly $68,000. The report doesn't say what percentage of Americans are holding several different debts, but given the total amounts involved, it's clear that some of them must be.

Now, there's a big debate among financial experts about the best way to pay off multiple debts. They all agree that you should focus your efforts on one debt, pay it off as fast as possible, and then take the amount you've been throwing at that debt each month and pile it all on to the next debt, and so on until you're debt free. Where they disagree is about which debt to tackle first. The most logical approach is to pay off your highest-interest debt first, since that's the one that's costing you the most. But as some experts point out, people aren't always logical, and many people won't stick to a program like this because they don't feel like they're making any headway. These people, they argue, should instead focus on their smallest debt, so they can pay it off quickly and get a morale boost that will keep them on track.

These two conflicting approaches are called the debt avalanche (because it goes from the highest peak of interest to the lowest) and the debt snowball (because it starts with small amounts and builds up to larger ones). And a separate strategy, which can be combined with either of these, is debt snowflaking: scraping together lots of small sums over the course of a month to put toward debt repayment.

In my latest Money Crashers article, I outline these three different approaches to debt in detail: how they work, their advantages and disadvantages, and who's most likely to benefit from them. I hope that most of my readers won't benefit from this article, because they don't have multiple debts to deal with—but for those who do, or who know others who do, I hope this analysis of the different methods will be useful. And for everyone else, I hope it will at least be interesting.

Best Way to Pay Off Debt – Snowball vs. Avalanche vs. Snowflaking