Ready to pay off your debts? Great. Now, which debt will you tackle first?
The “best” order in which to pay off your debt balances is a long-debated topic. As with just about everything else in personal finance, no single answer is right for everyone. The ideal debt payoff method is the one best suited to your personality and preferences.
[See: What to Do If You’ve Fallen (Way) Behind on Your Credit Card Payments.]
The debt snowball. The debt snowball method is all about building momentum. To start, you list your non-mortgage debts in order from the smallest balance to the largest. For example:
| Debt | Balance | Interest rate |
| Loan from Mom | $500 | 0 percent |
| Credit card No. 1 | $2,000 | 19 percent |
| Student loan No. 1 | $3,200 | 4.5 percent |
| Credit card No. 2 | $5,000 | 18 percent |
| Student loan No. 2 | $16,000 | 6 percent |
Make the minimum payment on every debt except for the smallest — in this case, the loan from Mom. Any additional money you have goes toward that debt. Once it’s paid off, you move to the next debt on the list, making minimum payments on every debt except credit card No. 1. All extra cash would go toward that debt. Continue this process until your debts are gone.
The benefits: Assuming that your smallest balance can be paid off in a few months, you get the psychological benefit of a “quick win.” Small victories are encouraging and inspire you to keep going.
The drawbacks: This isn’t the most cost-effective way to pay off debt, and it can be really expensive if you have very high interest rates or a lot of debt that will take a long time to pay off.
Right for you? If you’re more motivated by hitting milestones than by optimizing to save the most amount of money, the snowball is probably the best method.
[See: 10 Easy Ways to Pay Off Debt.]
The debt avalanche. The debt avalanche likely inspired the debt snowball name. The goal here is to save the most money in interest. List your debts in order from highest interest rate to lowest, disregarding the size of the balances:
| Debt | Balance | Interest rate |
| Credit card No. 1 | $2,000 | 19 percent |
| Credit card No. 2 | $5,000 | 18 percent |
| Student loan No. 2 | $16,000 | 6 percent |
| Student loan No. 1 | $3,200 | 4.5 percent |
| Loan from Mom | $500 | 0 percent |
As with the debt snowball, you make the minimum payment on all of the debts except the first one, in this case credit card No. 1. Put all extra money toward the first debt until it’s gone, then move to the second one, and so on down the list.
The benefits: This is the most rational, mathematically sound debt payoff method. The average household with credit card debt pays more than $1,300 in credit card interest per year, according to NerdWallet research. The debt avalanche will save you the most money and, assuming you stick to it, will lead to the fastest payoff because you can put more money toward paying down principal rather than interest.
The drawbacks: Just because this approach makes the most mathematical sense doesn’t mean it’ll motivate you. If your highest-rate debt has a large balance, the slow payoff can be demoralizing because it’ll be a while before you hit a payoff milestone.
Right for you? This works for analytical types who are satisfied knowing they’re getting the best deal. Be honest with yourself. If that knowledge isn’t motivation enough, you likely won’t follow through until the end.
[See: 8 Financial Steps to Take After Paying Off a Debt.]
A combination. Instead of focusing exclusively on balances or interest rates, you can choose a middle path — ordering your balances in a way that provides maximum motivation, but attacking them one by one as with the snowball or avalanche.
For example, say you feel awkward about the small loan from your mom, and student loan No. 2 was from a degree you didn’t finish. You want both of these debts gone first because of the negative emotions associated with them. You decide to pay off Mom first because that loan is so small and deal with the large student loan next. After that, you want to pay off debts in order of interest rate:
| Debt | Balance | Interest rate |
| Loan from Mom | $500 | 0 percent |
| Student loan No. 2 | $16,000 | 6 percent |
| Credit card No. 1 | $2,000 | 19 percent |
| Credit card No. 2 | $5,000 | 18 percent |
| Student loan No. 1 | $3,200 | 4.5 percent |
It may sound strange to pay off debt according to emotion, but feelings already play a large role in many people’s finances: 49 percent of Americans say they have spent more than they can reasonably afford because of emotions, according to a recent NerdWallet study. So don’t discount the ability to put your emotions to positive financial use as well.
The benefits: Combining the two methods allows you to consider your feelings toward your debts and helps you eliminate negative emotions while paying off your balances. As a bonus, you’ll likely be more motivated to pay off the debts you really don’t like having.
The drawbacks: This isn’t the most sound method from a mathematical perspective, and it doesn’t necessarily give you the benefit of quick wins, particularly if the debts you target first are larger.
Right for you? If you have strong feelings toward one or more of your debts, or just want to pay off your debts in an order you choose, the combination method is the way to go.
The best debt payoff method is the one that will get you to zero. It doesn’t matter which method it is — just pick one and work to consistently pay down your balances.
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3 Ways to Pay Off Debt: Which Is Right for You? originally appeared on usnews.com
