In life, unexpected events can leave you between a rock and a hard place. You may face emergency expenses without the means to pay for them. While borrowing money can get you out of the situation, you must face debt repayment. If you have incurred debt, our debt snowball vs avalanche guide can help you decide which payoff strategy is right for you and how to implement it.
Debt can be a primary source of stress and financial hardship — approximately 340 million Americans currently share the $16.9 trillion household debt in the country. Many people find themselves in the difficult position of trying to figure out the best way to pay off their debts.
Without a proper action plan, achieving debt freedom can be challenging. However, there are various strategies you can employ to expedite the process of becoming debt-free.
In this blog post, we will explore the differences between the debt snowball and debt avalanche methods, weigh their pros and cons, and help you determine which strategy is best suited to your financial situation.
The debt snowball method focuses on behavioral psychology to motivate debt repayment. With this method, you start by listing your debts from smallest to largest, regardless of interest rates.
You then concentrate on paying off the smallest debt first while making minimum payments on the others. Once you’ve paid off the smallest debt, move on to the next smallest debt, and so on.
For example, you have the following debts:
If you use the debt snowball method, you will focus on paying off the $5,000 credit card debt first, followed by the $10,000 car loan, and finally, the $20,000 student loan.
The idea behind this approach is to create momentum and celebrate small wins along the way, which can help you stay motivated and committed to your debt repayment journey. It also enables you to gain confidence from each successive repayment — hence the phrase “snowball effect.
The debt snowball method provides several advantages:
While the debt snowball method has several advantages, it also comes with some drawbacks, including:
In contrast to the debt snowball method, the debt avalanche method prioritizes debts depending on their interest rates. With this approach, you arrange your debts from the highest interest rate to the lowest.
You then allocate extra funds toward the debt with the highest interest rate while making minimum payments on the rest. Once you’ve paid off the highest-interest debt, you can move on to the next highest-interest debt, and so forth.
Let’s use the previous example:
If you use the debt avalanche method, you will prioritize the $5,000 credit card debt first since it has the highest interest rate, then the $20,000 student loan with the second highest interest rate, and finally, the $10,000 car loan with the lowest interest rate.
The debt avalanche method helps minimize the total interest paid and the overall repayment period. Focusing on higher interest rate debts first can reduce the interest you pay and help you become debt-free faster.
The debt avalanche approach offers the following advantages:
Although there are several benefits to using the debt avalanche approach, it also comes with some disadvantages, including:
The debt snowball and the debt avalanche methods offer different advantages and disadvantages, so it's essential to understand their differences before deciding. Choosing between the two ultimately depends on your financial goals, personality, and financial situation.
Here are some factors to consider when deciding which method is suitable for you:
Once you’ve considered the factors mentioned, you can decide which debt payoff strategy is most suitable for your financial situation. Whichever method you choose, you will learn valuable money management skills that you can use throughout your life.
Making mistakes, deviating from your plan, or switching strategies doesn’t make you any less of a financial warrior. Remember to give yourself some slack as you work toward getting out of debt.
Once you’ve chosen between the debt snowball and debt avalanche methods, it’s time to implement your strategy. Here are the steps to get started:
Paying off debt is a journey that requires discipline and persistence, and it’s easy to become discouraged on the way. Here are some tips to stay motivated:
Paying off debt can be challenging but also incredibly rewarding. By choosing the debt payoff strategy that best fits your needs and implementing it with discipline and perseverance, you can be on your way to debt freedom.
The debt snowball and avalanche methods are two effective approaches to debt repayment, each with advantages and considerations. By understanding the differences between these methods and evaluating your financial situation and goals, you can determine which strategy aligns best with your needs.
Regardless of your chosen method, remember that the key to successfully paying off debt is consistent effort, perseverance, and a commitment to your financial well-being. You can get out of debt and achieve financial freedom with the right strategies and support.