I have multiple debts.  Which one(s) should I pay off first?

The Avalanche and Snowball debt-repayment methods are different ways to pay down debt effectively.  The Avalanche method is based around interest rates, and the Snowball method is based around account balances.

The Avalanche Method

This method is all interest-rate based: you pay off the debt with the highest interest first, making the minimum payments on all others.  When the first debt is gone, you take all the money you were using on the first debt, and apply it to the second.  Continue until all your debts are gone.

The Snowball Method

The Snowball is all about account balances.  Concentrate your money on the debt with the lowest balance, while still making the minimum payments on the other debts.  Once that small debt is gone, move that extra money over to the next-smallest debt, and so on and so forth, until you only have the biggest debt remaining.  Then, you should be paying a bunch of money per month towards that one, and all of a sudden, it’s gone!

Hybrid Methods

You also don’t have to do one method exclusively – instead of throwing all your extra dough at the lowest-balance or highest-interest debt, you can do half and half (or whatever ratio suits you).  That way, you can have some of the efficiency of the Avalanche, while getting the psychological satisfaction of the Snowball.

Really, it’s up to you to decide how to best pay your debts – these are just two well-known ways of doing so.

The Verdict

In terms of paying the least amount of interest (and in so doing, the least amount of money), logically, you should use the Avalanche Method.  However, humans ain’t always logical.  If it makes you feel better to pay down your smallest debts quickly, go for it!  That’s what I did.  I know it wasn’t the most efficient use of my money, but the value of the happiness and motivation that paying off smaller debts gave me was worth the money I spent.

Even with the less-efficient method, I paid off my student loans in 5 years instead of 10.  When I say “there’s no wrong answer”, I mean it.

Get aggressive with those loans!  Pay ’em down, avoid interest like the plague, and show ’em who’s boss!