Debt Snowball vs Debt Stacking Methods

Debt Snowball

vs.

Debt Stacking Method

 

It’s the age old question when it comes to getting out of debt – “Which debt do I payoff first?”

Many experts have varying opinions on which method is better, but most of them fall into two categories:

1. The Debt Snowball Method
2. The Debt Stacking Method

The debt snowball in essence says that you should order your debts from smallest to largest and start by paying off the smallest debt. The idea here is that this allows you to have “quick wins” since you will pay off a few debts in a short amount of time and seeing this will keep you motivated to get out of debt. In addition, once you pay off those smaller debts, you take the amount of money you were putting towards those each month and use that to pay off the next debt.

The debt stacking method is when you pay off the debts in order of interest rate. Now of course, this one sounds the most productive. I mean, you would be paying the least amount of interest so doesn’t it just make sense? Well, it’s complicated.

The main reason this is not so straight-forward, is that there are so many more variables to debts, especially when you include student loans.

Are they private or federal?

If they are federal, are they subsidized or unsubsidized?

Is the interest rate variable or fixed?

Does it seem like we are going to see high spikes in the variable interest rates anytime soon?

Are you going back to school, in which case you are able to defer the loans for a period of time without them accruing interest?

Even with all of these questions looming about, the big name financial advisors typically just pick one method and run with it. There are many pro’s and con’s to this strategy. Of course, it’s easier on them since they can just give everyone a one-size-fits-all approach, make it sound simple, and market it correctly. The major downside is that these are not “personal” plans. They are standard plans given to someone with a large income and $150,000 of debt, as well as the person who owes $10,000 but can’t seem to find any extra money in their budget.

The formula just doesn’t work for every person. We all have different situations, different mindsets and varying future plans as well.

After a lot of trial and error, I found that a mixture of these two suited my needs best.

Below is the list of my debts and I’ll show you what it looks like using both the snowball and debt stacking methods.

Name of Debt Balance Interest Rate Minimum Payment
Sears Credit Card $1500 0% interest $53
Wells Fargo Credit Card $6000 0% interest $133
Car Loan $4000 2.99% interest $192
Federal Subsidized Loan $6500 6.5% interest $80
Private Loan #1 $4500 4.5% interest $48
Private Loan #2 $38,500 3.0% interest $219
Total $61,000 $725

I rounded off the numbers just to make it a little easier to understand. My total minimum payment for all debts each month is $725. Let’s say I had an extra $275 to put towards my debts each month. That means I’m paying a total of $1,000 a month.

With the debt snowball method, ordered from smallest to largest, my repayment plan would look like this:

Name of Debt Balance Interest Rate Minimum Payment
Sears Credit Card $1500 0% interest $53 + $275 = $328
Car Loan $4000 2.99% interest $192
Private Loan #1 $4500 4.5% interest $48
Wells Fargo Credit Card $6000 0% interest $133
Federal Subsidized Loan $6500 6.5% interest $80
Private Loan #2 $38,500 3.0% interest $219

Using this method, within one year the Sears bill and car loan would be paid off. Those are two quick wins that are very helpful in keeping you motivated to live below your means and get out of debt. Using this method, I would be debt free by February of 2020.

With the debt stacking method, my repayment plan would look quite different:

Name of Debt Balance Interest Rate Minimum Payment
Federal Subsidized Loan $6500 6.5% interest $80 + $275 = $355
Private Loan #1 $4500 4.5% interest $48
Private Loan #2 $38,500 3.0% interest $219
Car Loan $4000 2.99% interest $192
Wells Fargo Credit Card $6000 0% interest $133
Sears Credit Card $1500 0% interest $53

Using the debt stacking method, the first debt would not be paid off until December of 2015. It could be hard to stay motivated without seeing any of your loans disappear for about 18 months. In addition, all of the debts would not be paid in full until May of 2020.

In this situation, the debt stacking plan actually keeps you in debt for about 3 months longer than the debt snowball would.

The debt stacking experts argue that you end up paying more in interest using the debt snowball method. But if you’re putting $1000 towards your debts and you only have to do this for 68 months as opposed to 71, does that really matter?

Again, every situation is going to bring about different results depending on what kind of loans you have, the interest rates and the balances. They call it personal finance for a reason. To find the best way to pay off my debs, I used a method that incorporates ideas from both the stacking and snowball methods.You can find that post here.

It may be difficult at first to get your plan worked out and find what suits your personal situation the best. There are a lot of things to take into consideration when making your “get out of debt” plan. But as long as you do the work, having a plan is the most important part. Without a plan, your money will get spent incorrectly or applied towards the wrong balances.

Creating a plan will keep you motivated, on track and confident when you start putting your extra cash towards bettering your future.

What does your get out of debt plan look like?

 

Snowball Photo
Stack Photo
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Chenell

I am Chenell Tull and so far, I've had a pretty rough time with my student loan debt. Recently, I've figured out a more productive "get out of debt" plan and the goal is to pay off over $60k in just 36 months. If you want to learn more, subscribe to the mailing list and get FREE updates on my successes and failures on this journey out of debt.