Paying Down Debt: Avalanche vs. Snowball
Are you ready to finally get a handle on your debt and start paying it off? If so, then you’ll want to continue reading to learn about two of the most common strategies for paying off debt: avalanche and snowball. They honestly aren’t all that different, and the bottom line is they get you to the same destination: debt free! So my tip is to not overthink it and just choose the method that you feel fits your personality better.
Alright, let’s break them down for you.
Avalanche
With the avalanche method of paying off debt, you focus on paying off the debt with the HIGHEST INTEREST RATE FIRST, while continuing to pay the minimum on all of the others.
For example, Client A has the following outstanding liabilities:
As you can see, her bank credit card has the highest interest rate at 22.10%. If she chooses to use the avalanche method, she would set her store credit card, student loan, and auto loan to pay the minimum due each month while putting every single dollar she possibly can towards paying off her bank credit card until the balance is $0.00.
Next she would move on to paying off her store credit card. This one has another high interest rate at 17.99%. So again, student loan and auto loan can stay at minimum payments and now she would put every dollar possible towards paying off her store credit card.
This process continues by then moving on to the student loan and finally, paying off her auto loan.
Make sure to never miss a payment on any of your debts, you must at least make the minimum payment every single month and on time!
Like an avalanche, you start from the highest point (highest interest rate) and move down. This method is often encouraged because you end up paying less interest in the end than the snowball method. However, if your highest interest rate debt is large, it may take a while for you to feel like you have made progress or make a dent.
So if you need small victories to keep going, this method may not be the best for you. However, if you are fully committed to paying off your debt and get enough satisfaction understanding the mathematical logic of paying less interest (money) in the end, then go for it!
Snowball
In contrast to an avalanche, a snowball starts small and grows into something bigger. When utilizing the snowball method, you focus on paying off your SMALLEST BALANCE FIRST, then continue to tackle debts based on their balance size.
This method is very popular because it gives people a victory early on. For example, if you have just a $75.00 urgent care bill sitting around that you’ve been avoiding, that is likely to be one of your smallest debts, so by paying that off first, you get a quick victory and sense of accomplishment. This usually encourages people to continue on.
Looking again at Client A as an example:
You can see that the smallest balance is on her store credit card. So if she chooses the snowball method, she will set the bank credit card, student loan, and auto loan to minimum payments, and put every dollar she can towards paying off the $650 balance on her store credit card.
Once the store card is completely paid off, she will move on to the bank credit card with a balance of $10,000. Following that, she would pay off her auto loan, followed by her student loan, which has the highest balance at $25,000 and probably feels the most daunting.
The snowball method is really a psychological one. It’s not always the best mathematically, but we are humans and not computers, so it is ok. If this is the method that will get you to actually do it and finally pay off your debt, then it is entirely worth the slightly more you will pay in interest spread out over the years!
Once you’ve picked one…
Again, the destination is the same and both methods will get you there, so choose whichever strategy you think gives you a higher chance for success. A key to being successful with either method is to really strive to put as much money as possible towards the repayment of your focus debt. If that means working extra on the side or cutting down on frivolous spending, just do it. We can all make excuses, but I’d argue that there are few better feelings than being debt-free!
Once you have paid off your debts, do whatever you can to not get back into the situation you were in before. Pay off your credit card every single month, in full, and on time. [NO, IT IS NOT GOOD FOR YOUR CREDIT SCORE TO CARRY A BALANCE, WHOEVER TOLD YOU THIS WAS LYING]
Remember that if you continue to do the same things in life that got you in to debt in the first place, then you are likely to end up back there unless you make a change. If you feel like you could use some extra help and want to learn how to truly get good with money, then join me for a live class!