Boring investor sites state there are two ways to pay off debt. The avalanche method is when you pay down higher interest loans/debt first. In the snowball method you pay down the loans with the lowest balances off first. This is assuming you have multiple loans/debts which I’m sure 99% of individuals do. What are the advantages of these methods?
In the avalanche method, as you might imagine, you will save money on the interest. You know how much I hate interest. My rate on my loan with FedLoan Servicing is a grand 7.37%. Basically robbery.
The snowball method could prove beneficial for a person in the fact that paying off smaller loan balances could eliminate that monthly payment or obligation. That extra money could then be used towards increasing payments on the remaining debts. There is also highly gratifying mental pleasure in paying off smaller loan balances.
Which method do I employ? I’ve decided that the snowball method works best for me. I have one huge loan with FedLoan servicing for about $490k and a smaller cookie crumb of a loan with Navient for a mere $15k. My monthly obligation for Navient is $192 a month. Thus eliminating this debt would give me that extra month toward the big kahuna. Now, this doesn’t just apply to student debts either. I do also have a car payment but this debt is a zero percent interest rate (yes, you heard me right) thus, paying this off early just doesn’t make sense. Also keep in mind that credit cards can have the worst interest rates in all of time, so take a look and really analyze your debts. How you pay off your debts can actually save you time and money as I have mentioned before in my previous blog post about biweekly payments.