Carrying debt can be an enormous burden on our lives. It weighs heavily on our minds, reduces our freedom of choice and can cost us hundreds – or even thousands – of dollars in interest payments.
If you have multiple debts to pay off, it can be challenging to decide where to start. There are two popular repayment strategies that experts recommend for people with multiple debts who are looking to reduce the amount they owe: the snowball method and the avalanche method.
In this article, we’ll explore the differences between these two strategies and provide guidance on how you can choose the best approach for your situation.
To Reduce Balance or Reduce Interest: Which is Best?
The biggest question people have when they begin their debt reduction journey is whether to prioritize reducing their overall debt balance or tackle high-rate debt. That’s where the snowball and avalanche methods come in.
The avalanche method involves prioritizing debt that has the highest interest rate over debt with lower interest rates. This means that you will reduce the overall amount you will pay overtime by reducing interest rate payments.
On the other hand, the snowball method prioritizes balance by paying off debts with the lowest balance first and moving up from there. Some people prefer this method because you end up settling with creditors more quickly, which can be motivating and build momentum.
There isn’t necessarily a “correct” answer when it comes to which is best. Depending on your preferences and circumstances, you may prefer one method over the other once you understand the differences.
Understanding the Snowball Method
The snowball method is an approach to debt repayment that focuses on building momentum and motivation. Here’s how it works:
- List Your Debts: Rank your loans from smallest to largest balance.
- Focus on the Smallest Debt: Pay above the minimum on the loan with the smallest balance while making minimum payments on all other loans.
- Roll Over Payments: Once the smallest debt is paid off, apply its payment amount to the next smallest debt.
- Repeat: Continue this process until all debts are paid off.
Pros
- Make Quick Wins: Paying off smaller debts quickly provides a sense of accomplishment.
- Stay Motivated: The psychological boost can help maintain momentum.
Cons
- More Interest: This method may result in paying more interest over time compared to other methods.
Understanding the Avalanche Method
The avalanche method is an approach aimed at minimizing the overall cost of debt. Here’s how it works:
- List Your Debts: Rank your loans from highest to lowest interest rate.
- Focus on the Highest Rate Debt: Pay above the minimum on the loan with the highest interest rate while making minimum payments on all other loans.
- Roll Over Payments: Once the highest interest debt is paid off, apply its payment amount to the next highest interest debt.
- Repeat: Continue this process until all debts are paid off.
Pros
- Save on Interest: Reducing high-interest debts first can save money in the long run.
- Repay Debt Faster: This method can lead to quicker overall debt elimination.
Cons
- Slower Progress: It may take longer to see the first debt paid off, which can be less motivating.
Choosing the Right Method for You
When deciding between the snowball and avalanche methods, consider the following factors:
- Financial Goals: If your primary goal is to save money on interest and pay off debt faster, the avalanche method may be more suitable.
- Psychological Factors: If you need quick wins to stay motivated, the snowball method could be a better fit.
- Debt Amounts and Interest Rates: Analyze your debts’ balances and interest rates to see which method offers the best balance of motivation and financial savings.
Combining Both Methods
In some cases, a hybrid approach might work best. Start with the snowball method to gain momentum and then switch to the avalanche method to save on interest. This way, you get the motivational benefits of quick wins and the financial benefits of reduced interest costs.
Both the snowball and avalanche methods are effective strategies for digging out of debt. The best method for you depends on your financial situation, goals and personal preferences.
Remember, the most important step is to start and remain committed to your debt repayment journey. The feeling once you’re on the other side of debt is worth it.
