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There are two winning debt-reduction methods. Choosing the one that’s best for you, and听the one you鈥檒l be more effective at executing,听has a lot to do with your psychological makeup.

Is the snowball method right for you?

The snowball method, which focuses on motivation, is usually better for people who need frequent psychological wins.听This kind of momentum and progress听provides the motivation to stick with it and pay off debt, even when the temptations to spend creep up. This method encourages streamlining all aspects of banking; fewer听accounts听and consolidation of debts.

Snowballers听often struggle with impulsive shopping and spending (landing them in debt in the first place).听They have a hard time focusing on long-term financial goals and aren鈥檛 likely paying attention to their interest charges. It鈥檚 common for snowballers to start the snowball process with an overwhelming number of accounts for banking, credit cards and loans, spread out across different financial institutions. Their wallets, glove boxes and purses are full of cards ... and a gazillion receipts.听

Is this you? Try the snowball method of debt reduction.

How the snowball method works

You鈥檒l pay off your debts starting from the smallest balance to the largest, regardless of the interest rate. The psychological benefit is that you鈥檒l see quick wins early, which builds motivation and momentum.

To set it up, you鈥檒l list your debts from smallest to largest. You’ll continue to make minimum payments on all debts, however you鈥檒l pay a little extra听鈥� even $10 or $20 a week听鈥� toward the smallest debt until it鈥檚 gone. Then you’ll move on to the next smallest debt, rolling over the freed-up payment into it听鈥� this is the 鈥渟nowball鈥� effect. The main drawback is that you could pay more interest over time, since the higher-rate debts may linger longer.

Is the avalanche method right for you?

The avalanche method, which focuses on math and logic, is better for minimizing cost and length of time in debt. This method works best for people who are highly analytical and numbers-driven, and are just plain patient. Small milestones and “quick wins” aren鈥檛 key motivators; the greatest possible savings on interest听is.

Avalanchers tend to start out with bigger balances and steep interest rates on credit cards, HELOCs, loans or even private loans between friends and family members. They have a good awareness that the magnitude of debt can take years to pay off, and are familiar with interest charges. Many have complex budgets, yet struggle with cash flow management.

Is this you? Try the avalanche method of debt reduction.

How the avalanche method works

The avalanche method saves the most money in interest and gets you out of debt faster,听but requires delayed gratification. You pay off debts starting with the highest interest rate first, regardless of balance size.

To set it up, you鈥檒l list debts from highest to lowest interest rate. You’ll carry on making minimum payments on all debts, however you鈥檒l direct all extra money to the highest-interest debt,听typically on a weekly basis,听until it鈥檚 paid off. Even smaller sums help. Once that鈥檚 gone, you’ll move on to the next highest-interest debt, and repeat.

Progress can feel slower, since the highest-interest debt might also be a large balance.听The motivation is knowing you鈥檒l save the most money on interest as possible.

Both the snowball and avalanche methods can be powerful tools for paying down debt, but neither will stick if spending habits and budgeting issues aren鈥檛 addressed. I鈥檝e seen families wipe out听$70K only to be buried again within a year because the root cause went untouched. Fix the behaviour听鈥� your money psychology听鈥� and the method will work. As the debt comes down, and you prove to yourself you can do this, you鈥檒l feel better.