What this article covers
Opher Ganel explains the two strategies that work best for paying off multiple debts: target the highest interest rate first, or target the lowest balance first. The math favors the first, but early wins help many people stick with the second, so the right choice comes down to one honest question about your own discipline.
Key Takeaways
There are two best ways to pay off debt: highest interest rate first or lowest balance first
Both methods have you pay the minimum on every debt except one target, then roll that payment into the next target once it is paid off. The only difference is the order: the avalanche-style approach targets the highest-rate debt, while the snowball-style approach targets the smallest balance.
Paying the highest-interest debt first minimizes your total interest cost
The quicker you retire higher-interest debts, the less time they have to run up their higher cost. Opher Ganel notes that if you were a robot or computer, this strategy would always win.
Paying the lowest balance first is easier to stick with, and that can make it the better choice
Behavioral finance research cited in the article shows people are more likely to keep up with a difficult program when they experience early success. If you are not sure of your discipline, paying a bit more interest is worth it if it keeps you going until every debt is gone.
Why Debt Takes a Financial and Psychological Toll
We’ve all been there. Student loans to help pay for tuition. A business loan to help rent an office space and furnish it before you see any paying clients. Credit card debt to cover expenses while you start building your practice. It’s tough to get your education and start a practice (or any other business) without incurring debt, and usually many sorts of debt.
When I started my post-doc (more years ago than I like to think), I had just moved to the US and borrowed $6000 at 10.4% (!) interest to buy a used car. Paying nearly $200 per month isn’t easy on a $31,000 salary. Especially when that salary needed to pay the rent and put food on the table for my family. That’s how I know the financial and psychological toll owing money takes.
What’s the Best Way to Pay Off Debt? Two Proven Strategies
If you too have more debt than you’re comfortable with, what’s the best way to pay it all off? It turns out there are two “best ways” to pay off debts, and your personality determines which one you should pick.
Think of money like a river, with interest like a current you have to overcome. To pay off debt, you have to paddle against that current. If you don’t paddle fast enough, the current will carry you further and further downstream. In financial terms, if you pay less than the interest on what you owe, you fall deeper and deeper into debt.
There really are two best strategies for paying off your debt.
- Pay the minimum on all your debts except the one with the highest interest rate, and as much more as you can on that highest-rate debt. Once that one is paid off, add the amount you’ve been paying against it to the next-highest-interest debt. Then, keep moving down the list to the next-highest-interest debt until you’ve paid off all your debts.
- Pay the minimum on all your debts except the one with the lowest balance, and as much more as you can on that one. Once that debt is paid off, add what you’ve been paying against it to your next-lowest-balance debt. Then, keep moving down the list until you’ve paid off all your debts.
Debt Avalanche vs. Debt Snowball: How the Two Methods Compare
If you read carefully, you noticed that the two strategies are similar. Each time you retire your current “target debt,” you add what you paid against it to your next target.
The difference is the order of picking those targets. The first method has you targeting the one with the highest interest rate. In the second, it’s the remaining one with the lowest balance.
In both cases, as you retire more debts, you pay ever-growing amounts to your next target debt, retiring those ever more quickly.
The first method is like the kayaker choosing to fight the strongest current first, knowing it’ll get progressively easier after that. In financial terms, the quicker you pay off higher-interest debts, the less time those debts incur their higher cost.
The second method is like our kayaker working on the easiest current first. This lets him build up his paddling skill and endurance, making it easier to tackle stronger currents later.
If you were a robot or computer, the first strategy would always win. However, most people find the second strategy easier to stick with. Behavioral finance research shows you’re more likely to keep up with a difficult program if you experience early success.
Avalanche or Snowball? How to Choose the Best Debt Payoff Method for You
To choose which method is best for you, ask yourself, “Am I disciplined enough to stay the course even if I don’t see the evidence of success (retiring a debt) early, or am I more likely to stick with it if I have such an early success?”
If you feel disciplined enough to stick with the harder rowing, choose the first method, targeting the highest-interest debt first. This will minimize your overall interest cost.
However, if you’re not sure of your discipline, target the lowest-balance debt first. That’s because it’s worth paying a bit more interest if it keeps you paddling until you reach your target.
So, which method is right for you?
Frequently Asked Questions
What is the best way to pay off multiple debts?
The article describes two equally valid approaches. Pay the minimum on all debts except one target, put as much extra as you can toward that target, and roll its payment into the next target once it is paid off. The target is either the debt with the highest interest rate or the one with the lowest balance.
Should I pay off the highest-interest debt or the smallest balance first?
Paying the highest-interest debt first minimizes your overall interest cost. Paying the smallest balance first gives you an early win, which makes many people more likely to stay the course. Opher Ganel suggests choosing based on how disciplined you are.
Why do some people choose the lowest-balance method if it costs more interest?
Behavioral finance research shows people are more likely to keep up with a difficult program if they experience early success. Retiring a small debt quickly provides that success, and the extra interest can be worth paying if it keeps you making progress.
What happens if you only pay the minimum or less than the interest on a debt?
If you pay less than the interest on what you owe, your balance grows and you fall deeper into debt. The article compares interest to a river current: unless you paddle faster than the current, it carries you further downstream.
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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
About the author
Contributing Writer, Wealthtender
My career has taken some unexpected turns, from earning a PhD in experimental high-energy physics, to conducting cosmic-ray research in Antarctica, to supporting NASA projects and programs, to running my own consulting business. I also run several other small businesses and help my wife run her Marriage and Family Therapy practice.
Those experiences taught me to question assumptions, think critically, and recognize that real-world decisions of any significance rarely have simple answers that apply to everyone. Today, I bring that perspective to writing about personal finance. Drawing on my analytical background, business experience, and research, I explore financial decisions, challenge conventional wisdom, and help readers understand the tradeoffs that can affect their financial well-being. To complement my own research and experience, I also weave insights from financial professionals into my articles, drawing on their expertise and real-world experience helping clients navigate financial decisions and challenges.
At medium.com/@opher-ganel, you can read more of my articles and subscribe to receive email notifications when new ones come out.