Debt Payoff Methods - Financially Engaged

Debt Payoff Methods – Which One Should You Choose?

Everyone can relate to the fact that debt is far too easy to accumulate and way too hard to pay off. Whether it’s a mountain of student loans, credit card debt, auto loans, or a mortgage, debt payoff can feel nearly impossible. It’s a drag on your current and future life all at once.

According to Northwestern Mutual’s 2018 Planning and Progress Study, almost 30% of people think it’ll take them over 10 years to pay off their debt (excluding their mortgage) and 1 out of every 10 Americans believe they will be in debt for the rest of their lives! With the average debt (excluding mortgage) reaching $38,000 per person, it’s no surprise that reducing debt was voted the number one financial priority – especially for millennials!

As we’ve recently mentioned, we just paid off our student loans and auto loan and now we’re debt free! However, this would not have been possible if we didn’t understand the different payoff methods at our disposal and have an organized way of tracking our progress.

This approach worked so well for us that we wanted to build an even better tool to help everyone else achieve a debt-free life too!

In order to pick the appropriate debt payoff method for you, it’s important to first understand the two popular options out there.

Debt Payoff – The Avalanche Method

After ensuring you’re making the required minimum payments for each type of debt, the avalanche method allocates any remaining funds towards the debt with the highest interest rate. Then, once you pay off the debt with the highest interest rate, you allocate the minimum payment from this debt (plus any remaining funds) towards the debt with the next highest interest rate.

You continue this approach until all debt is paid off.

Let’s do a quick example and say you have the following debt:

  • Student Loan: $20,000 with a rate of 5% and minimum payment of $200 a month
  • Credit Card Debt: $25,000 with a rate of 22% and minimum payment of $600 a month
  • Auto Loan: $8,000 with a rate of 8% and a minimum payment of $100 a month

Let’s assume you’ve looked at your income and expenses and feel comfortable contributing $1,000 a month towards becoming debt free. Note: If you’re unsure about how much extra money you’ll have to contribute, you can use our free financial plan to organize your finances and save easier.

Under the avalanche method, you will allocate your $1,000 in the first month as listed below:

  • Credit Card Debt (22% rate): $700 ($600 minimum payment + $100 extra funds)
  • Auto Loan (8% rate): $100 minimum payment
  • Student Loan (5% rate): $200 minimum payment

Once the credit card is paid off, you will transition the funds from the credit card to the auto loan and have the following payments:

  • Auto Loan (8% rate): $800 ($100 minimum payment + $700 extra funds)
  • Student Loan (5% rate): $200 minimum payment

This highest interest rate approach continues until you are debt free!

If you’re looking for the method with the least amount of total interest paid over the life of your loans and the fastest path toward becoming debt free, then this method is for you. Being debt free is the goal… so you may wonder who wouldn’t want to use this method?

The catch is that this method requires a little more emotional willpower. After a long day of stressful work and managing all of life’s responsibilities, we all know it’s very easy to be lacking in this department.

Under the avalanche method, you won’t be able to start crossing loans off your list as quickly as you would with the snowball method, so there’s a chance you can become discouraged and give up.

Debt Payoff – The Snowball Method

If you’re being honest with yourself and still think you’ll need to see your first loans disappear sooner in order to stay motivated and on track, then the snowball method is right for you.

The snowball method is another debt acceleration method, but instead of paying off the highest interest rate loans first, it focuses on paying off the debt with the lowest balance first. And as soon as possible!

Under the snowball method, you continue to allocate your extra funds towards the debt with the lowest balance, until all balances are paid off. As you pay off each loan, your extra funds continue to grow similar to a snowball rolling downhill.

We prefer the avalanche method due to the quicker path to a debt-free life and lower total interest paid, and we believe our free tool can help keep you motivated. However, we feel any method that works for you is a good one! After all, there’s a reason the snowball method is so popular.

Debt Payoff – Our Free Plan

If you’re feeling overwhelmed with the math, details, and choices, don’t worry! That’s completely normal. We know paying off debt is already an uphill battle, so we created a free awesome tool to help make the process feel easy and motivating!

All you have to do is enter in your debt details.

In addition to the avalanche and snowball methods, we give you the option of choosing a custom payoff plan where you choose the order. We also show you key stats for each method, including when you’ll be debt free and how much you’ll pay in interest, so that you can make educated decisions at the beginning of your debt free journey.

One of our goals with our free debt payoff tool is to help your motivation and momentum continue to grow, regardless of the method you choose. Our progress tracker is built so you can truly visualize your results.

Please check out our tool, encourage others to do the same, and give us feedback! We’d love to hear from you!


What debt payoff method do you think is best for you? How are you currently tracking your payoff progress?


  1. Alyx says:

    This is very helpful! I have been using the snowball method, but I may switch to the avalanche! Thanks for providing such great information!

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