This week we're diving into two popular debt payoff methods: the snowball and the avalanche. Both aim to get you debt-free, but they approach it from different angles. Let's explore the difference between these two methods and show which one we stand behind as the best way to pay off debt.
You'll learn how to apply these methods to your own debt, step-by-step, so you can start making progress today.
"Choosing the right debt payoff method isn't just about math; it's about finding a strategy that keeps you motivated and moving forward."
Okay, let's talk about getting rid of debt. It's a big deal, and honestly, it can feel overwhelming. But, like tackling any big project, having a plan makes all the difference. That's where the snowball and avalanche methods come in.
What is the Debt Snowball Method?
The core of the debt snowball method is prioritizing your debts based on their balance, not their interest rate. You start by paying off the debt with the smallest balance first, regardless of whether it has the highest interest rate.
The steps to the Debt Snowball plan are as follows:
- List all of your debts from the smallest balance to the largest.
- Pay the minimum payment on every debt, except the smallest debt.
- Put any extra money towards only the smallest debt until it is paid off.
- Once the smallest debt is paid in full you roll the what you were paying on the last debt into the next smallest balance debt.
Example:
Your lowest debt is a medical bill with a balance of $1000. You only pay extra on that medical bill until it is paid off.
Let's say you can pay $100 on that medical bill every month. Once it is paid off you then roll that $100 you were paying on the medical bill to your next lowest balance debt.
Your next lowest balance debt is a credit card with a minimum payment of $50. Your new payment on that credit card is now $150 per month. $50 minium payment plus the $100 you were paying on the medical bill.
You repeat this process for each debt listed smallest to largest. As each debt is paid off the snowball grows larger.
Pros & Cons of the Snowball Method
Pros:
- Quick Wins: You see progress fast, which can be incredibly motivating. Seeing those small debts disappear gives you a psychological boost.
- Simple: It's easy to understand and implement. You don't need to be a math whiz.
- Emotional Boost: The emotional aspect of seeing debt disappear is a huge factor.
Cons:
- Higher Overall Interest: You most likely will end up paying more in interest over the long run, compared to the avalanche method.
What is the Debt Avalanche Method?
The debt avalanche method is a debt repayment strategy that prioritizes paying off debts with the highest interest rates first.
The steps to the Debt Avalanche plan are as follows:
- You begin by listing all your debts and organizing them from the highest interest rate to the lowest.
- While making minimum payments on all other debts, you allocate any extra funds to the debt with the highest interest rate.
- Once the highest-interest debt is paid off, you shift your focus to the debt with the next highest interest rate, and so on.
- This approach minimizes the total amount of interest you'll pay over the life of your debts.
Pros & Cons of the Avalanche Method
Pros:
- Lowest Total Interest Paid:This is the most significant advantage. By targeting high-interest debts first, you save the most money on interest charges.
Cons:
- Can Be Less Motivating: The highest-interest debts often have larger balances, meaning it can take longer to see noticeable progress. This can be discouraging for some people, making it harder to stay committed to the plan.
- Requires Discipline: This method requires discipline and a focus on long-term financial goals. It typically does not provide the quick wins that the debt snowball method offers.
Research indicates that people are more likely to stick to a debt payoff plan when they experience early wins, reinforcing the benefits of the snowball method.
Which Method do We Reccomend?
We see the most consistent success for people who use the Debt Snowball Method
Why?
If you go with the Debt Avalanche method and your highest interest rate debt is also your largest at $15,000.
It may take you a long time to pay off that debt. Many people get frustrated at the lack of progress and eventually just give up.
The Snowball Method can give you some quick wins which builds confidence in your finances. For many people, the psychological benefits of the snowball method make it a more effective long-term strategy.
Want to get started paying off your debt?
Join our free Life Without Payments Masterclass where you learn more about the debt snowball and so much more. We also will give you a free Debt Snowball Worksheet for signing up.
Sign up for the Free Life Without Payments Masterclass
