Debt Snowball vs. Debt Stacking

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Two popular methods people can use to pay off debt include the more traditional method of "debt stacking" and another method called the "debt snowball," recommended by financial adviser Dave Ramsey.

Each method has pros and cons, so before deciding how to tackle your own debt, it's important to understand what each strategy entails and why one method may or may not be better for your own situation.

Debt Stacking

The debt stacking method (also known as the debt avalanche method) recommends that you make a list of all your debts, ranked by interest rate, from highest to lowest.

For example, you might owe:

  • Mastercard, $2,500—19 percent, highest interest rate
  • Visa, $7,500—13 percent, second-highest interest rate
  • Car Loan, $4,000—8 percent, third-highest interest rate
  • Student Loan, $1,900—5 percent, lowest interest rate

The debt stacking method advises that you make the minimum payment on all your loans. Then, you should throw all of your extra money toward paying off your MasterCard, which has the highest interest rate, at 19 percent.

Once you've wiped away your 19-percent MasterCard debt, tackle the Visa balance, which has the second-highest interest rate, at 13 percent.

It'll take you a long time to repay the Visa, since it has the highest balance, at $7,500. Stick with it. Whenever you're done, you can start paying off the debts with lower interest rates.

This method saves you the most money in interest payments, but it might take a long time to get a high-balance debt crossed off your list. You may feel frustrated after investing so much time and energy toward paying down a loan without feeling the mental victory of crossing it off your list.

Debt Snowball

According to the snowball method, you should throw every spare penny toward paying off the loan with the lowest balance, regardless of interest rate.

If you used the snowball method, you would re-order the above list as follows:

  • Student Loan, $1,900—5 percent, lowest balance
  • Mastercard, $2,500—19 percent, second-lowest balance
  • Car Loan, $4,000—8 percent, third-lowest balance
  • Visa, $7,500—13 percent, highest balance

You'd make the minimum payment on all your loans. Then, you'd throw every extra penny toward the debt with the smallest balance, regardless of the fact that, in this particular case, it also has the lowest interest rate.

The idea behind this method is that paying off the loan with the smallest balance will give you the psychological feeling of victory when you cross that loan off your list. That mental win will motivate you to continue saving money and repaying your debts.

This method gives you a more immediate feeling of victory, but it might cost more. Making only minimum payments on your highest-interest debt means you'll pay more in interest, as compared to the debt stacking method.

Choosing Which Method to Use

Personal finance is, well, personal. Paying off debt can be a little like dieting. Sure, there are ideal eating plans out there, but let's be realistic: Most people aren't going to stick to a perfect diet. The best diet is the one you'll stick to.

Paying off debt is similar. Be honest about making a budget that fits your personality and keeps you motivated. You'll pay the most in interest if you don't stick with your debt payoff plan.

It's OK to experiment, too. If the debt stacking method sounds more appealing to you right now, and you try it out for a few months and find that it's not working, there's no reason you can't switch to the debt snowball method.

Having a plan is a good idea, but that doesn't mean you need to hold yourself to it 100 percent of the time, 365 days of the year. Things change, life throws curve balls at you, and you need to adapt. That sometimes means changing your financial strategies. So don't beat yourself up if the first method you try doesn't work. Keep at it until you find something that does.