How to Prioritize Your Debt Repayment

Avalanche, Snowball, or Snowflake, How to Pay Off Your Debt

Couple looking at bills together on computer
Hero Images/Getty Images

Paying off debt can be a long journey depending on how much of it you have. It's extremely easy to lose motivation and give up, especially when you have other financial goals competing for your limited resources. That's why it's so important to create a plan to pay it off

However, even that can seem overwhelming when you have six different accounts you're trying to pay off. Thankfully, there are a few rules of thumb that can help you prioritize your debt repayment.

But first, let's get your debt repayment information in order before we get into a plan, as it will make things much easier to organize.

Organizing Your Debt

First things first, you need to find the following information on all of your debt:

  • Amount owed (balance)
  • Minimum payment
  • Interest rate/APR
  • Payment due date

This information can typically be found on the statements you receive in the mail or online, as long as you have an account to access them. 

If you can't find this information easily, then simply call your debtor and ask them for the information. They should be able to look it up for you. 

The two biggest pieces of information we'll be focusing on involve your balance and interest rates, so at least make sure to get those two before proceeding. Having a budget in place might also make this easier.

Prioritize Your Debt By Interest Rate — Debt Avalanche Method

This is known as the "debt avalanche" method, and mathematically, it's the one that will save you the most money over the course of your debt repayment journey.

What you need to do is order your debts from highest interest rate to lowest interest rate

By focusing on paying off your debt with the highest interest rate first, you save more money because the interest that's accruing on your accounts will decrease. Interest can be an extremely nasty factor in your debt repayment plan if you're not careful.

 ​

For example, say you have a $10,000 loan with an interest rate of 7%, and you have 5 years to pay it off. Your minimum monthly payment would be $198, but not all of that payment will go toward paying the balance off.

Instead, around $58 of your first payment will go toward interest instead. Ouch. Contrast that with your last payment, in which only $1 goes toward interest. 

Making extra payments means ripping through interest faster so more of your payments can go toward principal. However, this method fails to focus on the psychological impact debt often has.

Prioritize Your Debt By Balance — Debt Snowball Method

What if you order your debt from highest interest rate to lowest and find that your highest interest rate debt is also the one you owe the most on? That might seem defeating, and you haven't even started to plan yet.

If this turns out to be the case, and you're looking at a mountain you don't think you can reach yet — and aren't excited to reach — then you might be better off with the debt snowball method. Instead of interest rate, you focus on paying off the debt with the lowest balance first and then work your way up. 

No, you're not going to save as much money this way, but getting out of debt is often an emotional experience, not a logical experience.

You should choose whichever method makes you the most motivated to kick your debt to the curb. If getting a small win every so often is more appealing, then the snowball method is the way to go.

Let's take a closer look at how these debt repayment methods work as there's more to them that meets the eye.

Snowballing Your Payments for Momentum

Right now, you might be making the minimum payments on your debt, but that's not going to allow you to reach debt freedom very fast. If your goal is to become debt free so you can start living life without shackles, then you want to start paying extra on your debt. That's exactly how the snowball method works. Say you have 4 debts: 

  • Credit Card #1: $5,000 @ 12% interest
  • Credit Card #2: $1,000 @ 15% interest
  • Student Loan: $14,000 @ 4% interest
  • Personal Loan: $10,000 @ 7% interest

    With the debt snowball method, you would focus on credit card #2 first. For the sake of example, let's say your minimum payment is $20. You decide to pay $100 towards it while continuing to pay the minimums on all your other debts. 

    So you're paying a total of $120 toward credit card #2. Once you've paid it off, you move on to credit card #1. Let's say the minimum payment for that was $60. You roll the $120 you were paying on credit card #1 over, for a total of $180.

    After that's paid off, you focus on your personal loan, which had a minimum payment of $198. With the $180 you were using to pay off credit card #1, you can pay $378 towards it. 

    Once you've paid the personal loan off, it's time to kill your final debt: your student loan. The minimum payment on this was $260 — but coupled with $378, you're paying $638 towards it. 

    With this example, it should be easy to see how you're "snowballing" your payments together and making a bigger impact each time you pay off a debt. If you didn't use this method and kept paying the minimums across the board, it would take you much longer to pay off your debt. 

    You're just using the resources you have in a better way. Paying $100 instead of $20 on credit card #2 isn't even necessary — you could pay just the $20 and snowball that — but it does help get you in the mindset of paying extra on your debt. 

    You can use this same principle for the avalanche method, but the order in which you pay off your debts would be different.

    The Debt Snowflake Method

    Yet another option you have is to use the debt snowflake method, and this method can be used in conjunction with either the debt snowball or debt avalanche methods.

    As you might guess from the name, "snowflaking" payments just means making little payments whenever possible.

    Let's say you find $5 at the gym, or your coworker gives you $10 for the meal you bought them months ago (that you forgot about), or you receive $50 from a relative for your birthday.

    In all of these instances, you received small windfalls of money — this is money you weren't expecting and hadn't accounted for in your budget.

    Since it's "found" money or "extra" money, it goes straight to your debt. You could have lived without it, so why not put it toward your #1 goal of getting out of debt?

    You can also choose to snowflake payments whenever you have extra money in your budget. For example, say you only spent $20 on gas this week, as opposed to your regular $40. Send that other $20 toward your debt.

    Finally, you can use this method if you get paid on an irregular schedule. Perhaps you're a freelancer or you get paid on commission, and you can't cash flow large, extra lump-sum payments. Try to send smaller payments toward your debt whenever you spend less than you thought you would. Or, as a freelancer, take 5% out every time a client pays you and put it toward your debt.

    This method might seem ineffective at first, but small amounts add up. If you pay $20 extra each week, that's an extra $100 you've paid toward your debt! Plus, you get the benefit of feeling like you're making progress several times throughout the month, each time you schedule a payment.

    How Should You Choose to Prioritize?

    Neither method is right or wrong. As with many things in personal finance, it's completely up to you which method you choose. 

    What's important is that you're paying off debt and making progress on that end. Paying off debt gets you closer to your other financial goals, and your money finally becomes your own. You'll have the peace of mind that you no longer owe anyone. 

    You also don't necessarily need to choose between the two methods. You could try the snowball method, and if you find it's not motivating, switch to the avalanche method. Your plan doesn't need to be set in stone. The more important thing is that you're focused on paying off your debt

    Don't Forget to Budget for Payments

    As you should budget for saving, you should also budget for extra debt payments, especially if you're used to paying the minimum.

    Scour your budget and see if there are any places you can temporarily take from. Maybe you can go without dining out for a month, and use the $50 you've allotted for that toward debt. Or maybe you can cancel cable and start sending $150 toward your debt.

    Figure out how much you can afford to pay, and make sure it's accounted for in your budget. You don't want to budget just for the minimum payments and then use whatever is left at the end of the month toward your debt because you'll end up spending that money. Account for the extra payments ahead of time so you're not tempted to spend that money on anything else.

    If you're not feeling thrilled at the prospect of cutting back on some things, remember that this is temporary. You could always start a side hustle to earn more money on the side if you'd rather keep your spending the same, and send all the extra money you make toward debt.

    What if you don't have any extra money, and your debt payments are crippling? Call your creditors and ask them if there's any way to work out a lower payment to start out with, until you can gain momentum and possibly earn more. Just be cautious of debt management companies offering this service for a fee.

    With a little bit of organization, diligence, and persistence, you'll become debt free soon enough.