Should You Crush Debt or Grow Wealth First? What Works Wednesday

Learn the debt snowball vs. avalanche methods and how to decide between paying off debt or investing to grow your wealth with Leland Gross of PeaceLink Financial Planning.

Episode transcript:

What Works Wednesday: Debt Management Basics

Today is What Works Wednesday. I'm your host, Leland Gross, and today we're going to be talking about debt and two big questions I get a lot around that topic of different types of consumer debts.

The first question is: what's the most efficient way to pay off your debt?

The second question is: how do I know if I should pay off my debt or save and invest?

Debt Avalanche vs. Debt Snowball: Which Strategy Works Best?

There are a couple ways to think about this. I would say there's really two strategies that I kind of fall back on. There are different ways you can do it, but there's two kind of solid strategies called the debt avalanche and the debt snowball.

Basically, you're going to line up all your debts—your credit cards, your car notes, your student loans. You're going to line them all up with balances, interest rates, and minimum payments.

And remember: always pay the minimums. Do not miss a debt payment because that is where you get into delinquency, default… bad stuff.

How the Debt Avalanche Method Works

With the avalanche, you prioritize the highest interest rate. Pay the minimums on everything. Then, throw any extra payment at the highest interest debt (usually a credit card).

Once that’s paid off, roll that payment into the next highest interest rate.

Your monthly payment amount stays the same, but you keep attacking the debt with the highest cost to you.

How the Debt Snowball Method Works

The snowball is similar, but instead of interest rates, you focus on the lowest balance first.

Pay off the smallest debt quickly. Then roll that payment into the next smallest.

It creates momentum. Psychologically, it feels good to cross full debts off the list, and that motivates you to keep going.

Avalanche vs. Snowball: Which Is Better?

So, avalanche is often more efficient on paper, but the snowball tends to be more sustainable in real life. Clients often stick with it longer because they see quick wins and feel the progress.

Both work. Which one you choose depends on your situation—and your mindset.

Should You Pay Off Debt or Invest Extra Money?

The second question I often hear is: If I have extra money, should I use it to pay down debt, or should I invest it? Some people say, “Always pay off debt. Debt is bad.” I don’t always agree with that. The truth is: it depends.

Here’s why: I measure everything through net worth. Paying down debt increases net worth. Investing increases net worth. Taking on more debt lowers net worth.

So the real question is: Which option will grow your net worth the most?

When Paying Off Debt Makes the Most Sense

Let’s say you have a credit card at 25% interest. There’s no investment out there that will consistently guarantee you 25%. That card is working against you, lowering your net worth by 25% annually. In that case, paying off the card is the better move.

When Investing Is the Smarter Move

Now, let’s flip the script. Imagine you have a mortgage from 2021 at 2.5%, and your investments are averaging 10%. In that case, your money works harder invested than it does paying down that cheap mortgage.

The same goes for other situations—if an investment vehicle outpaces your debt interest rate, investing can be the smarter play.

This is why wealthy individuals sometimes take mortgages even when they could pay cash. Their money earns more elsewhere than the mortgage costs them.

How to Decide Between Paying Off Debt or Investing

So if you’re asking, “Do I pay off debt or do I save and invest?” the answer is:

Look at your debt balances and interest rates. Look at your savings and investment opportunities. Choose the path that grows your net worth faster.

Final Thoughts on Debt Repayment Strategies

Look into the avalanche and snowball. Run the numbers for your situation. See which strategy works best for your personality, and then ask yourself whether extra funds should go toward debt or investments based on how each one impacts your net worth.

And with that, go forth, build the life you want, and prosper.

Disclaimer

Before you go, I want you to know that this podcast is not intended to be tax, legal, or investment advice. The opinions shared by me or my guests are just that. I encourage you to seek counsel from a professional who knows you and your specific situation and goals.