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How to Pay Off Debt? The 3 Methods Explained

By Jimmy Turner, MD
The Physician Philosopher

By now, a lot of you 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.  He proposes one method that I think works for the vast majority of Americans.  Yet, today I’ll argue that method isn’t necessarily the best way to combat debt for high earning medical professionals who are most concerned about their student loan debt. In this post, I’ll discuss the three methods of paying off debt.  Then, I’ll tell you exactly how I paid off $200,000 in student loan debt in 19 months, and how you can use the same method to eliminate your debt quickly.

Method #1: The Debt Snowball Method

Dave Ramsey made the Debt Snowball method likely the most famous way to pay off debt. 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 then crush the next debt very quickly. To do this, you pay the minimum payment towards all of your debt, and then put any additional money towards your smallest debt first.  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. If you are concerned with how to pay off debt, then this is certainly one method that has a successful track record.  However, the reason it is good isn’t because of the math.  It’s because of psyschology.

The Snowball Method: Behavioral Finance

The reason that the debt snow ball method is good way to pay off debt is because it frames paying off debt in such a way that it provides better internal motivation.  With each debt that is paid off, you are encouraged that you are doing the right thing. As the snowball gets larger and larger, the encouragement does, too. 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.  If you have student loans – and aren’t planning on pursuing Public Service Loan Forgivness – then you should refinance that debt to the lowest interest rate and get a great cash back bonus. In the end, this method has been shown to have a higher compliance rate than the avalanche method.  But at what cost?

Method #2: The Avalanche Method

Some would say that the Snowball technique is not the best method when considering how to pay off debt.  A second method 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.

The Math Behind the Avalanche Method

While the snowball method wins when it comes to behavioral finance, the avalanche method wins when it comes to math. 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 using the snowball method. Second, there is an issue that isn’t commonly discussed when comparing these two methods.  For people who have refinanced their student loans (hopefully using a student loan refinance ladder), there isn’t always a guaranteed forgiveness upon death.  However, if you do die, your spouse can simply sell your car and not have to worry about it anymore. Simply put, the type of debt that you have matters.

Method #3: The Snow Plow Method

Both methods above will work to pay off debt.  However, neither of them is ideal for many medical professionals who feel an overwhelming need to crush their student loans first. Ironically, if you were wise and refinanced your student loans, then your student loans are likely neither the smallest debt and they also likely aren’t your highest interest rate debt.  So, neither the snowball method nor the avalanche method would have you focus on them first. So, I didn’t use either of those methods.  I used what I affectionally call the “Snow Plow” method.  See, I absolutely hated my student loan debt.  So, in keeping with the snowy debt theme, I painted a mental image of all the various piles of snowy debt that I had.  Then, I picked the one I hated most and drove my snowplow right at that debt until it was gone. This was accomplished through three specific techniques.  We paid the minimum payment on all of our debt akin to the snowball method, but then we focused a concentrated high monthly payment on our student loans (our least favorite source of debt).  Then, according to The 10% Rule, we limited our lifestyle creep and applied 90% of any additional bonuses, increases in pay, or surprise money towards our Snow Plow’s target. Using this method, we paid off $200,000 of student loan debt in just 19 months.  We reaped the psychological benefit of the snowball method, without sacrificing as much additional accrued interest.  It was a win-win for us, and it may be for you to if you are considering how to pay off your debt.

How to Pay Off Your Debt?

Honestly, this is a tough question to answer.  It depends on your pyschology of money, your ability to sustain your course, and how much you hate the various forms of debt that you have. When you have a $3000 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 so that you have discretionary income to apply towards one of the three methods mentioned above. 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 snowplow or 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!
Further Reading: If you haven’t refinanced your student loans through the new student loan refinance page, make sure you aren’t missing out on a sweet cash back deal and a lower interest rate on your student loan debt!

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 snowplow?  Leave a comment below on why you chose your method.

TPP

23 Comments

  1. Xrayvsn

    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.

    Reply
    • ThePhysicianPhilosopher

      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.

      Reply
  2. Jim Wang

    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.

    Reply
    • ThePhysicianPhilosopher

      Agreed. Behavioral finance seems to always matter more in the morning and. So, I am a fan of people using whichever one they are more likely to stick with.

      Reply
  3. Kpeds

    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.

    Reply
    • ThePhysicianPhilosopher

      We know the enemy, and it is us.

      Behavioral finance is super important and often much more important than the math

      Reply
    • Chris

      Exactly! That’s the exact approach we took towards our debt.

      Reply
  4. DA

    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.

    Reply
    • ThePhysicianPhilosopher

      Completely agree on all points. That’s an interesting way to think through it, too!

      Reply
  5. Gregory Haben

    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.

    Reply
    • ThePhysicianPhilosopher

      Yeah, it may be true that the avalanche method is more appropriate for high income earners or those who have already paid off debt. Otherwise, people may get dismayed and stop even trying.

      Reply
  6. Dr. McFrugal

    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.

    Reply
  7. Dr. Cory S. Fawcett

    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

    Reply
    • ThePhysicianPhilosopher

      I think you are spot on, Cory. It’s really the decision to get started in the first place, and the decision to relalize that debt should not feel normal

      Reply
  8. HighPlainsMD

    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%.

    Reply
    • ThePhysicianPhilosopher

      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.

      TPP

      Reply
  9. Jay Tank

    I’m just using brute force to pay down my debt, I consolidated all my student loans into one fixed payment, then plowing 15-20k monthly.

    Reply
  10. Bo @ The Dollar Blogger

    The snowball method can definitely help people feel relief as they pay down lower balances to zero one after the other. I personally like the avalanche method because, in the end, saving more money works better for me. I can definitely see the value in both methods, though.

    Reply
    • ThePhysicianPhilosopher

      Yeah, I like the avalanche in most situations.

      For my family, we used the snow plow method where we aimed the plow at the debt we hated most (student loans) and then went high interest to low interest similar to the avalanche

      Reply

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