Debt avalanche vs. debt snowball. How to choose the right path to debt-freedom. What we chose and the pros and cons of each.
There are two commonly used methods of paying off debt.
The reason why having a method is important is it acts as your debt payoff plan.
The two most widely used methods are referred to as the debt avalanche and the debt snowball.
Let’s dive a little deeper into each method so you can find the one that best suits your needs.
1. Avalanche
Under the avalanche method, you will make your debt payments based on interest rates.
This process of paying off loans has been around for quite some time and has proven its success in saving people money and helping people pay off debt!
Paying off debt using this method means you list your debts from the largest interest rate to the smallest.
Don’t make it any more complicated than that. Listing debts based on interest rate does entail a little bit of research but once figured out the method is simple.
For example:
Credit Card 1 – $5,000 18.9% APR
Student Loan 1 – $20,000.00 13% APR
Credit Card 2 – $1,600.00 9% APR
Student Loan 2- $16,000.00 6% APR
Car Loan- $30,000.00 1% APR
In this example, all of the debts are ordered according to interest rates.
That is the order that you would pay them off.
Note that while you are paying extra income to the first loan don’t forget to make the minimum payments on the others.
Pay off the highest one first (credit card 1) and work your way down completely disregarding the loan amounts
What are the benefits of the debt avalanche method?
- Mathematically it makes the most sense. Over time you will be saving money in interest. This gives some peace of mind knowing that during the duration of your debt pay off you aren’t throwing more money away.
- You could be paying off your debt faster with this method.
What is the debt avalanche’s weakness?
Simply put it is less emotionally satisfying.
When working on something as challenging as paying off debt staying motivated is important.
The downside to this approach is there is less frequent fulfillment and that can be discouraging.
According to the math, the debt avalanche makes sense but motivationally speaking it can be very daunting.
How to make this plan work for you…
If you choose the avalanche method to pay off your debt your probably more of a numbers person.
Knowing that so much of your money is going towards interest will be the motivation you need.
Down the road, if you are finding this strategy is becoming less and less effective you may want to look into either switching to the debt snowball or creating your own emotional support.
The downside to this method is that it can make you feel like your not making progress.
Focusing on more substantial loans at the beginning of your journey can make you feel like you have a large mountain to climb.
To create more motivation praise or reward yourslef during your pay off.
If you have some high APRs and big loan amounts cut them down into increments so you can celebrate during that time.
Maybe treat you and your spouse to a movie when you are halfway.
Every $10,000.00 take yourself out to a nice dinner.
Do something that keeps your motivation going because the worst thing you can do is quit altogether.
Watch my debt payoff method video here:
2. Snowball
For this method, you are going to list your debts smallest to largest by amount.
This method is highly encouraged by Dave Ramsey himself and is the preferred method described in his book The Total Money Makeover.
This method is just as simple as listing all of your debts beginning with the smallest loan.
Even if you owe $300 on your smallest loan it is your baseline to beginning to pay off your debt.
Using the example above…
Credit Card 2 – $1,600.00 9% APR
Credit Card 1 – $5,000 18.9% APR
Student Loan 2- $16,000.00 6% APR
Student Loan 1 – $20,000.00 13% APR
Car Loan- $30,000.00 1% APR
In the snowball method, all debts are listed according to amounts.
Here the same rules still apply.
You are to always pay your minimum payments on all other loans while putting extra money towards your smallest balance.
Beginning with the lesser loan you will be able to pay it off fairly quickly.
The way this strategy works is once you are done paying off the first loan that payment then snowballs to the next.
If your minimum payment for your credit card 2 was $120 per month once that is paid off you can then take the extra $120 plus any other income and put it towards credit card number 1.
Imagine having 5 buckets with 20 marbles.
And you start with 20 marbles to throw into each bucket.
You have to get all 20 marbles in the first bucket.
Once you have all the marbles in one bucket you can take all 40 marbles from that bucket and put them towards the next, then the next, then the next.
Your shovel marble amount will get bigger and bigger.
That is the debt snowball concept.
What are the benefits of the debt snowball?
- This method brings the most emotional satisfaction. Seeing your debt decrease in such a significant manner can be very rewarding. As you cross off each debt they begin to disappear giving you the motivation to move forward.
- Freeing up all of your previous payments will also make paying off the largest loan feel much faster as you have gained much of your income back.
What is the debt snowball’s weakness?
Technically you will be paying more money in the long run to interest rates.
If your interest rates are very similar or small there will not be a huge difference.
Loans like those from credit cards often times have very high APR’s those will make more of an impact.
How to make the debt snowball work for you?
Try keeping a log of each of your debts.
Debt-free charts is a great resouce.
If you constantly see the progress you are making you will quickly be able to pay off your debts regardless of interest rates.
You can also try refinancing some of those bigger interest rate loans.
This is not always something I recommend but if you are looking at APRs from 18-25% it may be something to consider.
If you feel like you can do a zero balance transfer for your credit cards that may be an option as well.
The catch is you MUST be able to pay it off in the duration of the grace period.
Which method did my husband and I choose?
We did the debt snowball method.
We are not math people and having the mental victories of each debt was key for us.
Some debts only took us months to get rid of.
On the other hand, our interest rates were pretty similar.
Our biggest loan was my husband’s WRX and that was also the smallest interest rate at almost 2%.
Our student loans ranged anywhere from 3-6% APR and were small enough that we finished them pretty quickly.
If you are going to take away anything from either of these suggestions you must pay attention to one loan at a time.
Speaking from personal experience focusing on one debt is going to give you the most progress.
A common mistake I see so many people make is trying to put their money into many different places.
If you continue to throw $100 here and $300 there you will be less likely to see any financial progress and it will extend the life of your loans.
My suggestion for you is to pick which one works best for the way your mindset works.
Nothing is going to work if you don’t take the time to do either one of them.
Some say that even taking a hybrid approach is the best option. Using the beginning of your journey to make small wins and after momentum is gained then switching to debt avalanche.
Each of these could be argued to be most effective but honestly either way works as long as you are moving towards the end goal of debt freedom.
Which method did you try or are considering trying for your plan to pay off debt?
Remember you have to have a strategy, failure to plan is planning to fail!
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