Often we get the question, what is the best plan to pay off debt? There are two main debt payoff plans that most people are aware of, Snowballing, and Stacking.
Snowballing is the process of paying off the lowest debt first and paying the minimum on their other debt. As you pay off the lowest debt, you moved to the second lowest, and so on and so forth.
Stacking is the process of paying off the highest interest debt first, paying the minimum on the other debt. Then as you pay off debt, go to the next highest, and so on and so forth.
There are pluses and minuses for both processes with the optimal goal of both to pay off your debt!!
Pro’s and Con’s of both
Snowballing– The biggest pro of snowballing is that there is an innate sense of satisfaction when you pay off smaller debt first. It moves quicker, and you are more likely to stay motivated. Also as you pay down, and off debt, you’ve got more money to apply to the next card and so on.
The biggest con of snowballing is that if your largest debt has the highest interest rate, you will probably pay more over the life of the debt.
Stacking– The biggest pro of stacking is that you pay the least amount of interest since you’re attacking the higher interest debt first.
The biggest con is that if your biggest debt is also your higher interest rate, it will take you longer to pay it off regardless. Sometimes this can be frustrating and too slow for the average consumer who wants to see immediate results of their work
While there are pro’s and con’s for both of these plans, they do share similarities. The premise is the same in that you have to list your debt, and interest rate if that applies, and you’re paying all extra money towards one debt, and minimum payments towards the others. As you pay off debt, you take that extra money and apply it to the next debt. It’s an avalanche of sorts as your money starts to grow towards paying down the debt. This in itself can be very motivating towards paying it down.
What it comes down to is a personal preference in my opinion. Experts can argue and agree to disagree about what’s best. It really depends on each different circumstance. Depending on amounts and interest rates.
If you’ve got 4 credit cards that all have $1000 on them. Then it makes more sense to go with paying down the higher interest rate first.
But if you’ve got 4 cards, each with different totals, like $10k, $6k, $2k, $1k, then it would make more sense to attack the smaller cards first and move your way up.
I personally am using the Snowball effect for my credit card debt. I need instant gratification and need to show things getting paid off quickly. I’m much more likely to keep after my debt if I see it shrinking and I can even think about each card getting paid off. Statistics also show that people are far more motivated in paying a debt when they see things being eliminated quicker. It’s really a personal preference and should be evaluated on a personal basis.
But congrats on reaching that first step, it’s definitely the hardest. We’re on this journey together!
