How Should I Pay Off My Debt? Two Methods

Financial Planning for Doctors

Lawrence B. KellerBy this point, a lot of people have heard the famous Dave Ramsey quote, “If you live like no one else, later you can live like no one else.”  Ramsey is known for being a proponent of attacking debt aggressively when people ask, “How should I pay off my debt?

He proposes one method that I think works for the vast majority of Americans, but today I’ll argue that method isn’t necessarily the best way to combat debt for high earning medical professionals.

I’ll tell you exactly how I am paying off $200,000 in student loan debt in two years, and how you can use the same method to eliminate your debt quickly.

The Debt Snowball Method

Before we describe the method that I used to destroy our debt, let’s first discuss Ramsey’s approach, which is often called The Debt Snowball method.

The name of the method is meant to provide a picture of a snow ball starting at the top of a mountain.  As it rolls down the mountain (and crushes debt) it picks up more snow (more cash flow) and turns into a formidable snow boulder that can crush debt very quickly.

The idea here is to put any additional discretionary money towards your smallest debt.  When that is paid off, use that money plus what you are currently paying to pay off the next debt.  With each debt being paid off, you’ll have increasingly larger cash flow to pay off the next debt.  Hence, its name – the snowball method.

The Avalanche Method

A second method that is available to pay down debt involves what is called the Avalanche Method.  (These people are obsessed with snow!)

The idea here is the opposite of the snowball method.  Simply locate the highest interest rate debt you have.  Take any additional money you have above your monthly minimum payments and start hammering away.

The more you can throw at it, the larger the avalanche, and the sooner your debt will be gone.

This is the method that I chose as I paid off $150,000 in student loans in my first 15 months out from training.  Using the snowball method, I should have paid off our remaining car loans first before getting to the student loans.

The Snowball Method: Behavioral Finance

The reason that this method is good is because it has a psychological motivation behind it.  With each debt that is paid off, you are encouraged that you are doing the right thing. And with the next debt, you can watch it disappear quickly as the snowball gets larger.

Most people that follow Ramsey’s method simply cannot see a way out of their mountain of debt.  For this reason, Ramsey’s goal is to prove early and often that anyone can eliminate debt.  After the first one is gone, it provides hope.

That is what the snowball method is all about. So, if you find yourself in a situation where you cannot imagine financial escape, cut your lifestyle down and start finding discretionary funding to chip away at the smallest debt you have.

In the end, this method has been shown to have a higher compliance rate than the avalanche method.  But at what cost?

The Math Behind the Avalanche Method

The bad part of course is the math and the rules behind student loans.

First, math just doesn’t work for the snowball method.

The snowball method encourages you to pay off your smallest debt.  Not your most expensive or highest interest rate debt.  Assuming 100% compliance to both methods, you will pay more interest on the snowball method.  That’s unless you start missing payments.

Second, there is an issue that isn’t commonly discussed when comparing these two methods.  For people who have refinanced their student loans, there isn’t always a guaranteed forgiveness upon death.  However, if you do die, your spouse can probably just sell your car and not have to worry about it anymore.

For this reason, it almost always makes sense to pay off any debt with interest rates >10% and then your student loans prior to paying off anything else.

How Should I Pay Off My Debt?

Honestly, this is a tough question to answer for most doctors.  Physicians usually don’t have a debt problem or a savings problem as much as they have a spending problem.  Simple math will show you that you cannot save or pay down debt if you spend all of your take home pay.

If young physicians could simply follow the path of Dr. EFI – and not Dr. Jones- they would be fine.  Instead, most physicians inflate their lifestyle and place themselves in a situation where paying down debt becomes very challenging.

When you have a $3,000 mortgage, $1500 car payments, $2000 in child care costs, and a huge student loan debt burden… the debt can seem insurmountable.

So, how should you pay off your debt?  The first answer is to avoid lifestyle inflation.

The second answer depends more on your personality.  If you have a personality that can visualize a plan, stick with it, and do what needs to be done… the Avalanche Method is going to win every time.

However, if you know yourself and need the small “wins” to keep you going, the snowball method may still be your friend.

Regardless of which snowy debt pay down path you travel, the take home is to pay down your debt.  Make a goal, write down a date, and chase after it!

Take Home

Paying down debt is paramount to financial success for most early career physicians.  For this reason, you should know that there are multiple methods to this madness.

However you ski this course, make sure that you pick one path and stick with it.  In the end, sticking with it matters infinitely more than which method you chose to use to attack the problem of debt.

Which method do you use to pay down your debt?  Snowball, avalanche, or neither?  Leave a comment below on why you chose your method.




18 thoughts on “How Should I Pay Off My Debt? Two Methods”

  1. This was the big disagreement I had with Dave Ramsey when I read his book because for me I am a logic/math guy and it made no sense to pay the lower interest first if that was the one with the smallest amount (even tilting the math towards the avalanche method more (higher balance, higher interest rate means more interest being accrued in same time period).

    I used the Avalanche method exclusively because that was my mindset and I didn’t need small victories to know what I was doing was right.

    I understand the behavioral science behind the snowball method but I think any physician who has already done delayed gratification (via time of education) can mentally handle it and do it the right way (Avalanche method). The actual savings will not be insignificant and could easily save you 5 figures in the long run which is not chump change.

    • I think you are right. The snowball method makes sense for people who are upside down in debt that they don’t have the means to climb out of. They need every bit of motivation they can get.

      The avalanche method makes more sense to me, too.

  2. The math may not work on the snowball method but sometimes it’s more about psychology than math sometimes. I’m like Xrayvsn, I’m a math person (also the reason why I probably never got into CC debt, the math on that is *terrible*) and the snowball method seemed terrible… but you can’t argue against its effectiveness. It’s gotten a lot of people out of debt and those folks likely wouldn’t have been able to do it the avalanche way.

  3. Whatever works is what wins. Paying down debt is the pits and whatever can get you to do it quickly and effectively is what you should go with.

    Investing, budgeting, debt. The math sides are easy for all three. Spend less than you earn and use that money to invest and pay down debt. We are the hard part. People and behavior get in the way of the math all the time!

    We currently only have student loan debt so dont have to pick a method.

    If we had multiple debts I would probably do some combination of the two. I’d get rid of any small loans first and then tackle the big ones based on interest rates.

  4. Another consideration I took into account when paying down debts when I had many many loans was to consider the payment amount to loan balance ratio. For example, if I had Loan 1 with a payment double or triple that of Loan 2 and the rate was negligibly higher for Loan 2, I’d consider prioritizing Loan 1 over Loan 2 so as to improve cash flow. If you would feel more comfortable with a little more breathing room in terms of cash flow, I could see payment to balance ratio playing a role in prioritizing loans that are relatively close in terms of balance and/or rate.

    Beyond that, I think avalanche all the way makes sense particularly for a high debt and high income professional early in their career.

    The snowball method is FANTASTIC for someone that has dug themselves into a huge consumer debt hole and is trying to change their behavior. If you feel you have the temperament and discipline to prioritize debt repayment over almost anything else, avalanche clearly wins out in terms of repayment efficiency.

  5. I had to use the snowball method to get my wife’s finances is order. There simply was not enough discretionary money to create a large enough impact an avalanche payoff without first paying off a couple smaller debts first. I think once you have say three or less major debts then avalanche payoff makes the most financial sense.

  6. I am team Avalanche because I like to see the mountain of debt crumble as fast as possible. Can’t argue against the math and logic. I used the avalanche method to pay for my med school student loan debt.

  7. I’ve played with this question several times when working one-on-one with people. My conclusion was it really doesn’t matter which method you choose to rapidly pay off your debt, avalanche or snowball. I tend to end up recommending a hybrid. The point is, you will pay off the debt so fast that interest rate becomes a very small factor. The longer you have a loan, the more important interest rate becomes. Pay it off quickly and the interest rate loses its effectiveness. The thing that saves you a fortune is the decision to pay off the debt and stay out of debt. Pick a method and get the job done. Stop managing your debt and start eliminating it.

    Dr. Cory S Fawcett
    Prescription for Financial Success

  8. I graduated residency without any consumer debt (other than a 0% interest car loan from the in-laws). My student loans were bundled into about 16 different loans ranging from $5,000 to $40,000 (interest rates between 6.55% and 7.65%). I found that continuing on income-driven repayment added a weird twist to the debate for me. Because I was preventing the capitalization of about $65,000 by staying on IDR, attacking smallest loans first (regardless of interest rate) made the most sense because I had to pay the smallest amount interest before I was starting to pay on principal.

    At this point it matters less and less because I only have large loans left and the avalanche method makes more sense to me. But in the beginning, paying $6k and having $5k of that go to principal of 6.55% made more sense to me than paying $6k and having only $1k of that go to principal at 7.65%.

    • That is an interesting twist! These days the vast majority should be in REPAYE where interest accrual is limited or PAYE which limits the amount of interest that can capitalize.

      I trained when those weren’t really an option, like you. So I understand completely where you are coming from. Makes a lot of sense what you did.


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