If you have tried searching for debt repayment plans or methods, you have more than likely come across the terms āDebt Snowballā and āDebt Avalanche.ā What do these terms mean? How are they different? Which one is best for me? These are all questions that may be running through your mind when trying to figure out this subject. We will do our best to help you navigate these methods and help you choose the one right for you.
What is the Debt Snowball Method?
The debt snowball method is a repayment plan that was made incredibly popular by Dave Ramsey. This method focuses on paying off your smallest debt first, regardless of the interest rate.
How Does the Debt Snowball Work?
Think of a snowball rolling down a hill. It grows larger and larger as it picks up snow and momentum along its path to the bottom of the hill. The snowball is your monthly payment on the debt you are currently focusing on. It gains momentum and grows larger as you pay off smaller debts.Ā
Start by making a list of all your individual debts from smallest to largest. Next, pay minimum payments on everything except the smallest debt. For the smallest debt, put extra money towards the smallest debt in addition to the minimum payment each month until it is paid off. Once the smallest debt is paid off, take what you were paying on the smallest debt and add to the next smallest debt on the list. Continue doing this until everything is paid off.
Why is the Debt Snowball a Good Idea?
With the debt snowball method, you get those small wins we all crave when creating a new habit. You build up momentum and grow those snowball payments especially with little extra āsnowflakesā here and there.Ā
What is the Debt Avalanche Method?
This debt repayment method focuses on paying off your debts in order from the highest interest rate to the lowest, regardless of balance.Ā
How Does the Debt Avalanche Work?
Think of an avalanche coming down a hill. It starts huge and as the snow covers the ground it eventually dissipates. The avalanche is your interest paid along the way, it starts off big and dissipates over time.Ā
Start by making a list of all your individual debts from the highest interest rate down to the lowest interest rate, regardless of balance. Pay minimum payments on everything except the debt with the highest interest rate. Put as much extra money on the debt with the highest interest rate each month until it is paid off. Once the debt with the highest interest rate is paid off, apply the funds from that payment to the next highest interest rate debt and so on.Ā
Why is The Debt Avalanche a Good Idea?
With the debt avalanche, you pay less in interest along the way.Ā
Which Plan is Best for Me?
While both plans have the same goal to help you get out of debt. Each has its pros and cons. If just starting out, the debt snowball is easy to get momentum going. For seasoned debt repayors with discipline to stick to a plan, the debt avalanche accrues less in interest. Discipline is key to making the debt avalanche work.
Keep in mind, if paying off debt was all about math, it would be a no brainer. But it is more than that, it is a mindset shift and a new habit. As with any new habit, quick wins and momentum help a new habit stick. Overall, more people have found success with the debt snowball method over the debt avalanche method simply for the ease of use.
If you need to take an in depth look at your financial situation and would like a financial plan, please feel free to give us a call to discuss how we may help.
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