It's not easy paying down debt, especially when you have multiple debts that keep piling up.
Breaking the journey down into simple steps can help make it feel less overwhelming. However you choose to tackle it, having a clear structure in place is important for making progress and reducing the burden on your physical, mental and financial health.
Two popular ways of paying down debt are the 'debt avalanche' and 'debt snowball' methods.
The two methods ask you to make minimum monthly payments on each of your debts except for one, which you concentrate on paying off in full before moving on to the next. The big difference is the debt which you choose to concentrate on:
The debt avalanche method involves making monthly minimum payments on all your debts and directing all the remaining money towards paying down the debt with the highest interest rate (regardless of balance) before moving onto the next.
The debt snowball method involves making minimum payments on all your debts and directing leftover money towards paying off the smallest balance first (regardless of interest rate) then the next smallest, and so on.
It's important to note that these methods are for people who have an adequate income to meet their minimum monthly payments and normal monthly expenditure. You may wish to seek more specialist financial support from StepChange or Citizens Advice if you are struggling to meet your existing commitments.
The best method for you will depend on your personality type as well as the size and interest rates of your debts.
Note: neither method involves paying down your mortgage, so don't include this on your list. This is because mortgages are often much bigger than other kinds of debt and will take you years to pay off, so it should be handled separately.
Mathematically, this method works out the cheapest. By prioritising a debt with a high interest rate over one where you're paying little to no interest, you'll pay less money over time as well as have more expendable income to pay off your other debts.
The big drawback of the avalanche method is that it can be very tempting to throw in the towel. If you're trying to pay off a large balance (such as a student loan) with an equally large interest rate, it will be a while before you see results. Without results, it's easy to lose motivation, and without motivation it's easy to give up.
If you do choose this method, we suggest creating ways to celebrate your progress and stay motivated.
Unbury.me is a great tool for visualising debt repayment plans. It shows US dollars though the numbers will turn out the same whatever the currency. It will help you to compare the avalanche vs. snowball method and understand how much you are saving by using the avalanche method. Since the main downside of the avalanche method is the feeling of not making any progress, you could combat this by regularly checking this tool and reminding yourself of how much money you are saving.
This method is best for motivation and keeping up momentum. Ticking off a debt will put wind in your sails and give you the drive to move forwards and tackle the next. The more debts you resolve, the more in control of your money you'll feel. And with a greater sense of control over your finances, you'll feel more positive about tackling the bigger debts.
On average, people with multiple debts become debt-free within 18-24 months when using the snowball method. Even though this method may seem like you'd be paying more, the difference is often marginal, plus the extra confidence boosts play such a key role that you may even clear your debts quicker.
It obviously depends on the size of the balance and the interest rates, but often, there's not much in it.
Let's do the maths:
This person has a total debt of £17,500. They have decided that they can put £999 each month towards minimum monthly payments and one of their debts.
Using the avalanche method they will be debt free in 1 year 7 months. They will pay £1,014.87 in interest.
Using the snowball method, they will also be debt free in 1 year 7 months. They will pay £1,157.48 in interest.
That's a difference of £142.61 (which over the course of 1 year 7 months works out to £7.50 a month).
If the difference will be marginal for you, we suggest using the snowball method since it will be more rewarding. Check what the difference will be for you on Unbury.me.
You could combine the two methods to get the best of both worlds. Write down all your debts complete with the APR (interest rate) and create an order to tackle them which takes into account both the size of the balance and the interest.
You might start, for example, by paying off a medium-sized balance which has a high interest rate before moving on to some small debts and then tackling the large ones.
Both of these methods do of course require you to have enough money at the end of each month to pay more than just the minimum payments.
If paying more than your minimum payments means that you won't be able to get by each month, then stick to the monthly minimum while looking for ways to either increase your income or decrease your spending. Making a budget will help you make changes to your spending, and choosing the right budgeting style for you can help you get the most bang for your buck - more on that here.
Whichever method you choose to run with, the important thing is that you're paying down debt, and that's always a good thing! Remember to review your plan and budget regularly to make sure that you're staying on top of things, and don't forget to congratulate yourself on your efforts.