Debt Snowball vs Debt Avalanche: The Ultimate Guide to Choosing Your Debt Payoff Strategy
Is a mountain of debt looming on you and you feel scared and confused about where to start? You're not alone. This plight is the same as millions of people are forced to grapple, yet the way to become financially free is not a mystery, but again a matter of strategy. There are two popular proven techniques that have come out as the champions of debt repayment, the Debt Snowball and the Debt Avalanche. But which one is right for you? It is not a mathematical task, but rather a psychological one. Selecting an inappropriate approach may result in burnout and desertion. The step-by-step guide will simplify the debate on debt snowball vs debt avalanche so that you will have the brightness and the confidence to start your own war on debt and emerge victorious.
Understanding the Common Ground: How Both Methods Work
It is important to note that there are similarities between the debt snowball and the debt avalanche methods before getting into the differences. These two strategies have the same underlying principle which is debt consolidation via concentration.
Here's the shared process:
List Your Debts: Compile all your debts- credit card, student loans, personal loans, car repayments etc.
Make Minimal Payments: On all except one of your debts, you are still making the minimum monthly payments. This maintains your balance of accounts and prevents a fine.
Attack One Debt with a Vengeance: You choose any additional money in your budget and invest it in one, specific debt.
Roll Over Payments: When you have completely paid the amount you were making payments on the first targeted debt, you roll over the full amount you had been making payments on and use the amount to pay the next debt on your list.
That is the reason behind this effect that produces a kind of rolling that causes a massive acceleration of your payoff process. The major distinction is the debt that you would first want to attack. It is here that the debate on debt snowball vs debt avalanche actually starts.
The Debt Snowball Method: Harnessing the Power of Quick Wins:
How the Debt Snowball Works
Debt snowball is a human centred approach to strategy. You put down all the debts in terms of the least outstanding balance to the highest regardless of the interest rate.
You pay minimum monthly on all debts with exception of the smallest one. That little debt comes down on your first fire. You beat it to death with all the extra dollars you have. This sense of achievement when you have cleared the first debt makes you feel like clearing the second on the list.
Example of the Debt Snowball in Action
Suppose you owe the following debts:
Credit Card A: balance = $500, APR =18%- minimum payment =25.
Personal Loan: 2000-2,000 (balance of 2000-600 dollars), 6% APR (minimum payment of 80 dollars).
Credit Card B: a balance of 4,000, 22% APR (minimum payment of 100)
You will have an additional two hundred dollar monthly to deposit on your debt. Here's the snowball plan:
Target 1: Credit Card A ($500). You will pay the $25 minimum and the additional costs of $200 = $225/month. It's paid off in about 3 months.
Target 2: Personal Loan ($2,000). You roll the 225 into its minimum payment of 80 with a monthly payment of 305. It's paid off in about 7 months.
Target 3: Credit Card B ($4,000). Now you roll the $305 into its $100 minimum and you pay 405/month. It's paid off in about 10 months.
All time to know you are debt-free:About 20 months. On the way you had three different wins.
Pros and Cons of the Debt Avalanche
Pros:
Saves the greatest sum of money: This is the least expensive method of paying off debt which reduces the total amount of interest to be paid.
Gets You Debt-Free Faster (Often): The avalanche method will in most instances clear you out of debt a little faster than the snowball, but in our example there is a slight difference between the two methods, which exposes an imbalance.
Financially Optimal: It is the approach that a financial planner is going to suggest on math grounds alone.
Cons:
Needs More Discipline: It is also discouraging to keep on working so long without having to pay any debt, and more so when your most interest sensitive debt is also a major one.
Increased risk of abandonment: The absence of initial psychological satisfaction will result in frustration and plan abandonment.
Debt Snowball vs Debt Avalanche: The Final Showdown
Then, the question is, in the debt snowball vs debt avalanche, which one wins? The solution is very personal.
Choose the DEBT SNOWBALL if:
- You are also easily demotivated and require fast results to keep you going
- You are thrilled by the thought of settling your accounts to the full.
- In the past you have had a problem in adhering to a budget or debt plan.
- You put more emphasis on behavioral optimization, not on pure mathematical.
Choose the DEBT AVALANCHE if:
You are highly disciplined and motivated by logic and numbers.
The thought of paying extra interest bothers you more than a slow progress bar.
Your highest-interest debts also have relatively low balances, allowing for a reasonably quick first victory.
Your primary goal is to save the absolute most money possible.
The Verdict: There Is No "Wrong" Choice
Consistency is the most significant indicator of running out of debt. The strategy you will best adhere to is the one that is the best debt payoff strategy. Not sure that you can maintain the avalanche method math, but you are afraid of losing momentum, make a hybrid method: use the snowball to clear up a few minor balances to get the ball rolling, then a switch over to the avalanche and use that newfound cash flow and confidence to clear out the high-interest debts
Your Journey to Debt Freedom Starts Now
The debt Snowball vs debt avalanche debate is essential as it will enable you to have a plan. Worrying about debt is one thing but taking a plan is another. It is either you have picked the motivational engine of the snowball or it is the financial efficiency of the avalanche as you are making a resolute move of reclaiming back your finances.
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