Learn which debts to pay off first and which to make minimum payments on by using a combination of the Debt Snowball and Debt Avalanche methods.

No Judgement Zone

Okay, so you’ve gotten yourself into a bit of debt. It’s okay. This is a no-judgement zone. We’ve all done it. According to Nerdwallet, the average credit card balance in the US increased by 20% in the last five years.

It’s what you do now that will make all the difference.

If you have decided to take control of your finances, then you need to eliminate debt. It is the first step in building wealth. But, where to start?

The best place to start is with a plan. But, the best plan in the world is garbage if you won’t stick to it. So, we need to come up with an approach that will get you out of debt quickly, while also building momentum as you go. Getting quick wins early on will give you dopamine rush that will inspire you to stick to the plan and maybe even go faster!

But, first thing’s first: you need to decide which debts to attack and in what order.



Debt Payoff Methods Defined

There are basically two schools of thought on how to determine which debt to pay off first.

The common denominator in both methods is that you make the minimum payment on all of your debts except one. Then, you put all of your resources into paying off whichever one debt you decide to place your focus. And, you do it as quickly as possible. Then, when it has been eliminated, you move on to the next one on the list.

With that in mind, let’s look at the two methods: The Debt Snowball, and the Debt Avalanche.

Debt Snowball

The Debt Snowball is the method for eliminating debt where you attack the smallest balance first.

To achieve the Debt Snowball, you make the minimum payments on all of your debts, except one. You line them up from the smallest balance to the largest, and you throw as much extra money at the littlest one as you can until it is eliminated.

Then, when the smallest debt is gone (forever), you turn your attention to the next-smallest debt. Repeat.

Debt Avalanche

The Debt Avalanche is the method for eliminating debt where you attack the smallest interest rate first.

To achieve the Debt Avalanche, you make the minimum payments on all of your debts, except one. You line them up from the highest interest rate to the lowest, and you throw as much extra money at the one with the highest rate as you can until it is eliminated.

Then, when the debt with the highest interest rate is gone (forever), you turn your attention to the next-highest rate. Repeat.


Personal Finance is Behavior

Choosing between the Debt Snowball and Avalanche methods is actually a bit more complicated than you would think.

From a purely mathematical perspective, the Avalanche method is superior. By eliminating the most costly debt first, you are minimizing the total amount of interest you pay. That allows more of your hard-earned money to be applied to principal, and gets you out of debt faster.

However, the only plan that works is the plan that you can stick to. Dave Ramsey is fond of saying that personal finance is 80% behavior. And, I agree.

The implication is that all the math in the world won’t help your finances if you can’t make a plan and stick with it.

Our brains love positive feedback. There is a nice dopamine rush that happens when we achieve a goal. The Debt Snowball method allows you to see your first win quickly. And, then you can build momentum.

So, how do you choose between the method that eliminates debt with the least cost and the one with the highest chances of success?

You combine them.


Debt Buckets

I prefer to combine the Debt Snowball and Avalanche methods.

I start by arranging my debt into buckets based on interest rates. All of the high-interest debts go into one bucket, and all of the low-interest ones go into another. I will attack the high-interest bucket first.

For example, some high-risk car loans, payday loans, and credit cards can have super high interest rates in the double- or even triple-digits!

On the other hand, things like car loans, personal loans, zero-interest short-term credit card offers, and student loans generally have interest rates that are less than 10%.

Debt Payoff Order

I definitely want to pay off the debts that are significantly more costly first. That means, I’ll make two buckets. Then, inside each bucket, I line up the debts from smallest to largest.

Essentially, I’m doing two debt snowballs. One for high-interest debt, and another for low-interest debt. But, I am only paying extra on one debt at a time. The smallest, high-interest loan gets all of my extra cash until it is gone. Then, I move on to the second smallest, high-interest loan and repeat the process. Then, after all of the high-interest loans have been wiped out, I will move on to the low-interest debts, starting with the smallest.


Payoff High-Interest Debt First, Generally

It is super easy to compare debts and determine which one to kill first. Happily, all creditors are required to tell you the interest rate on your loans. And, they all calculate them the same way.

Some types of lenders are more sneaky about how they tell you, but, if you read the fine print, even payday lenders tell you the annual interest rate.

Let’s look at a few examples to see why this combined Avalanche and Snowball system works.

Equal Sized, Different Rates

Let’s say you have two debts that are both $10,000, but one has an interest rate of 30% and the other has an interest rate of 3%, and it will take you a year to pay the first one off. That means the other one will just get the minimum payment, and almost no progress will be made.

Well, if you pay off the low-interest loan first, then the high interest loan will accrue about $3,000 in interest during that year. But, if you pay off the high-interest loan first, then the other one will only accrue about $300 in that same year. In this case, you would save about $2,700 by focusing on the high interest loan!

Different Sizes, Similar Rates

On the other hand, let’s say you have a $10,000 loan with a 5% interest rate, and another loan with a 4% interest rate for $1,000. A pure debt avalanche would have you pay off the $10,000 loan first, which would take you a year. In that time, the smaller loan would accrue about $40 in interest.

But, I think you should just knock out that $1,000 loan. You can do it in the first month, which only pushes back the pay-off of the second loan by one month. During that month, the second loan will accrue about $42.

Yes, that means your debt payoff journey will cost you $2 extra. But, you will get to feel the satisfaction of completely eliminating a debt in the first month! And, that is motivating! Who knows, maybe it will inspire you to do even more. Maybe you’ll sell a few things, or tighten up your budget, or something to accelerate your debt-free journey. That dopamine is a big help!

Two Debt Buckets

Hopefully, now you can see why I like two buckets. It allows you to focus on high-interest debts first, while also knocking out some smaller debts quickly.

Combining the Snowball and Avalanche methods is the best of both worlds.


When to Pay Off Debt

Paying off debt is one of the first steps in your journey to accumulating wealth. But, somewhat surprisingly, it is not the first step.

When you decide to take control of your finances, you need to make sure that you build a solid foundation. Nothing is more frustrating than seeing progress wiped out by an unexpected hiccup.

I have heard it a million times. There is no reason to get out of debt, because every time I start to make progress something happens. My car brakes down, I get sick, the water heater breaks, the kids need braces…

And, that is exactly why you need an emergency fund.

Four Pillars of Personal Finance

The debt avalanche and the debt snowball won’t help you at all unless you change the behavior that got you into debt in the first place.

A strong financial foundation is built on four pillars:

  1. Spend less than you make
  2. Have emergency savings
  3. Have diverse investments
  4. Rebalance

You cannot get out of debt if you spend more than you make. It is literally impossible.

And, if you don’t have any emergency savings, then any little speedbump will derail your plan.

Check out my article about the Four Pillars of Personal Finance to learn more about how to implement them in your own life.

Personal Finance Quick Start Guide

If you want more detail, I will happily send you my Personal Finance Quick Start Guide. It is a three-page intro into how I approach money. In it, you will find my 12-step plan to eliminate debt and build wealth.

Step one is to build an Undetailed Budget to learn where your money goes and find room for savings.

Step two is to separate your income and expenses, which will break your paycheck-to-paycheck cycle.

When that is done, you can move on to step three: save up an emergency fund with enough to cover you for 1 month. This mini, starter emergency fund will help you avoid falling back into debt if something comes up unexpectedly. (A larger, 6-month emergency fund comes later, step 7.)

And, then you can move on to step four, which is to tackle the smallest debt in the high-interest bucket.

Personal Money Coaching

Eliminating debt and building wealth is hard. It can feel overwhelming.

You can do it. I believe in you.

You can even do it all by yourself if you want!

But, if you want assistance, I’m here to help. My Personal Money Coaching services are available for you. During our sessions, we will:

  • Discuss your current situation.
  • Identify current challenges.
  • Identify money goals.
  • Create a specific plan.
  • Inspire new money habits.


Final Thoughts

Being in debt is no fun. We have all done it, and it is nothing to be ashamed about.

But, at some point you have to say “enough is enough.” When you reach that point and want to get out of debt, it helps to have a roadmap.

The Debt Snowball and the Debt Avalanche are perfectly valid methods. And, if one works better for you, great! We all have the same goal, which is to put you on a path to financial prosperity.

For me, a combination of the Avalanche and the Snowball worked best. I could attack the high-interest debt first, but also get a quick win by paying off a smaller loan even if it had a marginally higher rate than another one.

But, even with all of that, it is important to keep in mind that paying off debt won’t help you if you don’t change the behaviors that got you into debt in the first place. You need to build a solid financial foundation of spending less than you make and at least a small emergency fund. Otherwise, you are vulnerable to the slightest hiccup derailing your plans.

You can achieve your financial dreams if you make a plan and stick to it. I believe in you, and you should too. But, if you are overwhelmed and want help, check out my Money Coaching services. I’ll happily answer any questions you have, and we can work together to change your financial future.

What to Read Next

For more information, check out these articles that offer more detail about these topics. Enjoy!


I hope this has been helpful! I welcome your comments with your thoughts and questions. And, don’t forget to subscribe to the newsletter to get notified whenever a new article is posted.

2 thoughts on “How to Decide Which Debt to Pay Off First

    1. That’s a good point. Refinancing some debt may make sense as long as the cost to refinance is less than the interest you’ll save while you still hold the debt.

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