Debt Avalanche and Debt Snowball Methods
The Debt Avalanche and Debt Snowball Methods are two popular strategies for tackling debt repayment. The following is a short breakdown of how they work:
Debt Avalanche Method
The debt avalanche method focuses on paying off debts based on their interest rates. The system prioritizes those with the highest interest first.
Here’s how to implement it:
- Step 1: List Your Debts: Make a list of all your debts, including outstanding balances and interest rates.
- Step 2: Place in order by Interest Rate. Arrange your debts in descending order, starting with the one with the highest interest rate and ending with the one with the lowest.
- Step 3: Minimum Payments: Make the minimum payments on all your debts to avoid penalties or late fees.
- Step 4: Extra Payments. Allocate any additional funds you have towards the debt with the highest interest rate. Continue to make minimum payments on the others.
- Step 5: Snowball Effect. Once you’ve paid off the first debt, take the amount you were paying towards it (including the minimum payment) and apply it to the next debt on your list. This “snowball effect” allows you to accelerate your repayment as you move down the list, ultimately paying off all your debts.
By targeting high-interest debts first, the debt avalanche method minimizes the overall interest paid and will potentially save you a lot of money in the long run.
Debt Snowball Method:
The debt snowball method has been popularized by financial expert Dave Ramsey. It focuses on building momentum and motivation by paying off debts from smallest to largest. This is regardless of interest rates.
Here’s how the Debt Snowball Method works:
- Step 1: List Your Debts: Create a list of all your debts, including outstanding balances, regardless of interest rates.
- Step 2: Order by Balance. Arrange your debts in ascending order. Start with the one with the smallest balance and ending with the one with the largest.
- Step 3: Minimum Payments: Make the minimum payments on all your debts to avoid penalties or late fees.
- Step 4: Extra Payments. Allocate any additional funds you have towards the debt with the smallest balance. Continue to make minimum payments on the others.
- Step 5: Snowball Effect. Once you’ve paid off the first debt, take the amount you were paying towards it (including the minimum payment) and apply it to the next debt on your list. As you pay off each debt, the amount available for the next one increases, creating a snowball effect that builds momentum.
The Way Forward?
The debt snowball method prioritizes psychological wins and encourages individuals by providing a sense of accomplishment as smaller debts are paid off first, helping to maintain motivation throughout the debt repayment journey.
Both methods have their advantages, and the choice between them depends on your personal preferences and financial situation. It’s essential to choose a method that aligns with your goals and motivates you to stay on track towards becoming debt-free.
Both of these methods are good ways to approach paying off your outstanding debts. They are similar in that they are psychological approaches to the problem. They are methods that approach the problem from different ends of the problem, hopefully giving the same outcome.
Your own endeavor is what really makes the difference, and your ability to stick to the plan