Two of the most frequently employed strategies for repaying debt include the debt avalanche technique and the debt snowball strategy. Both strategies focus on the process of paying off debt but there are a few minor differences in the two.
What is the main difference between these strategies and how do you determine which one is best for you? Continue reading to learn more.
Debt Snowball Method
The debt snowball was a technique that was first popularized by the financial expert Dave Ramsey. This method will record every credit card debt, from the smallest to the biggest.
To begin it is best to pay off your most remaining debt first and then paying the minimum monthly payment on the other debts you have outstanding. Based on the size of your credit card balance, you might be able to complete this all in one go or it could take a few months.
When the debt with the lowest amount has been paid off you use the money to the largest amount of debt you have you have on your list. Continue doing this until you have reached your biggest outstanding debt.
When you use the debt snowball technique, you don’t have to think about the amount you’re spending on interest. This is the reason it stands out from the debt avalanche technique. Instead, it is focused on the psychological aspect of paying off debts and taking advantage of small successes to create momentum.
Repaying credit card debt is an emotional and challenging process. With the debt avalanche approach it might not feel like you’re making progress towards paying off your debts for an extended period of time.
This could make it difficult to keep pushing forward with your goals. When you’re able to snowball debt, you’ll be able to achieve the first “win” pretty quickly, which will help you stay motivated to continue.
Pros
- You’ll pay off small balances faster
- Early, quick wins can make it easier to stay motivated
- Having fewer outstanding balances can reduce stress
Cons
- You’ll likely end up paying more money in interest
- If you are paying more interest, it will take longer to get out of debt
Debt Avalanche Method
In the debt avalanche approach is to take care to pay off debt on the basis of the method that is bringing the greatest interest. Then, you’ll make the minimum payment on all other debts.
If your largest debt is a $20,000 high-interest credit card loans, you’ll have to pay it off prior to paying back an amount of $500 in medical bills. Many people prefer the idea of an avalanche of debt because mathematically speaking, it makes the most sense.
By tackling the highest-interest debt first you’ll pay less rates of interest in the long run. In addition, by making less payments, you’ll get out of debt faster.
But, if the largest debt is also costing you the highest amount of interest, it’ll take a while before you feel that you’re making progress in settling your debt.
Pros
- It makes the most sense financially
- The process of paying off the highest-interest debt first will save money over time
- Getting rid of high-interest debt will help you get out of debt faster
Cons
- You’re likely to have more outstanding balances, which could create stress
- It’s difficult to remain engaged when you don’t feel yourself making progress
How to Start Repaying Your Debt
Now you are aware of the differences between these two methods How do you determine which one is the best option for you? There are many opinions about which one is the best choice that can make it difficult to decide.
But, the truth is that it doesn’t matter what you choose, as long you have a plan to pay off your debt. So here are four suggestions to help you begin paying off your debt.
1. Do the math
It’s helpful to look over the numbers and determine how much you’ll end paying in interest for each plan. If you’re inclined to go with the debt snowball, and there’s much difference in the amount you’ll pay in interest, then stay to that strategy.
However, you could realize an avalanche of debt drastically reduce the amount of interest that you’ll be paying over the course of time. In this scenario it could be worthwhile to put in the effort to concentrate on paying off the most high interest debt first.
2. Be aware of yourself
Any plan for debt repayment you select must be a good fit for you. If you aren’t able to stay with it then it doesn’t matter what the math suggests.
Take some time to consider what strategy will be the most effective for your personal style and goals. Examine the level of motivation you are at, and think about whether it’s worthwhile to pay off those tiny credit card balances first.
3. Concentrate on one debt at a time
Whatever plan you pick regardless of which plan you choose, it’s essential to concentrate on one outstanding debt at one time. Of course, you’ll need to make the minimum payments on all debts, to ensure your accounts remain at a good state and your credit rating will not be affected.
But focusing on settling just one credit card at a given time will allow you to remain focused and progress faster than splitting your efforts.
4. Stick with it
Finally, you have to keep focusing on sticking to your goals for debt repayment regardless of the method you choose. Any repayment plan can be successful so long as you stay with it and never quit. Your financial future is far too important to ignore.
FAQs
What’s the difference between debt snowball and debt avalanche?
Debt snowball is the process of paying off the debts with the lowest interest first while debt avalanche involves paying off debts with high interest rates first.
Which method is better for eliminating debt?
Both have advantages and drawbacks. The debt snowball method could give you motivation and a sense of momentum and a sense of urgency, and the debt avalanche approach could save you cash in the long in the long. It is recommended to consider the advantages and disadvantages of each option before making the right choice for you.
How long will it take to payoff debts by using either method?
It is contingent on how much debt that you have and the amount you are able to commit to paying the debt each month. Both methods can be employed to eliminate debt within an appropriate length of time.
How do I determine which method of debt repayment is best for me?
It’s all about the financial circumstances of your life and what is driving you. If you require motivation to pay your obligations the debt snowball might be the best option for you. If you’re looking to save money on interest the debt avalanche approach might be the best choice for you.
Can I use both methods at the same time?
Yes, you are able to utilize elements of both approaches to settle your debt. For instance, you can make a point of paying off the least expensive debt with the highest interest rate first.
What other options do I have to pay off debt?
You can explore credit counseling, debt consolidation or debt management programs. There are loan programs to aid you in paying off the debt.
Can I receive assistance if I’m having difficulty paying off my debt?
Yes there are resources to assist you in understanding your options and formulate an action plan to repay your debt. You can contact an advisor in the field of finance or a credit counselor for more details.
Bottom Line
The debt avalanche concentrates on settling credit card debt that has the highest rate of interest first. The debt snowball is focused on the repayment of your debt starting with the smallest and ending with the highest balance.
The bottom line is it doesn’t matter if you decide to use the debt snowball, or debt avalanche, so long as you’re determined to removing debt.
Remember that you must be focusing on developing better habits throughout the process to ensure that when you have become debt-free you will remain the same way. The process of developing better financial habits includes doing things like making your own budget, improving your credit score and establishing an emergency fund.
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