Debt Snowball vs. Debt Avalanche: It’s difficult to wipe off debt, especially if you only make the minimum payment required each month. Accelerated payments are frequently necessary to get free and clear.
The debt avalanche approach and the debt snowball method are two different ways to pay off unpaid obligations. Both debt avalanche and debt snowball apply to the majority of consumer debt, including credit card debt, medical expenses, personal, student, and vehicle loans. They don’t work with mortgage payments and shouldn’t be tried.
Debt snowball vs. debt avalanche (FAQS & Answers)
What Does Debt Snowball Mean?
A form of accelerated debt repayment strategy called the debt snowball has you make a list of all your debts and pay them off in order of decreasing balance to increasing balance. After paying off one card, you transfer the funds to the next card, and so on, until all of your cards have been paid.
Does the Debt Snowball Really Work?
With the exception of home loans, the debt snowball may efficiently pay off almost any debt. Its attraction is largely psychological. It gives the debtor a motivational boost by instructing them to prioritise paying off minor obligations first.
Which is Better, a Debt Snowball or a Debt Avalanche?
Depending on whether we’re talking about a debt snowball or avalanche in financial terms or psychological terms, one is better than the other. An avalanche of debt saves money better than anything else. You will pay less interest since you will pay off your obligations in order of their interest rates, starting with the ones that are the highest. Regardless of the interest rates, some people find it much simpler to stay motivated when they pay off lesser obligations initially. Depending on your motivation, yes.
Debt snowball vs. debt avalanche: Which is better for debt reduction?
Debt snowball vs. debt avalanche?
You must identify your debts for each method and pay the minimum amount owed on all except one of them. Once the card is paid off, you go on to another bill, and so on, until all of your obligations have been paid off. Additionally, you may combine the two approaches. Choose a loan that has a high interest rate (for the avalanche strategy) but is reasonably small (for the snowball method). If those approaches don’t seem to be working, you might want to think about debt relief.
The difference between the two approaches is which debt you target first. You contribute more money to the debt with the greatest interest rate while using the debt avalanche approach. Regardless of the interest rate, you pay off the lowest balance first using the debt snowball approach. While both are effective ways to eliminate debt from your life, one may be easier for you to follow through on and have a bigger impact on your finances.
Debt Snowball
The debt snowball approach entails paying off the smallest debt first while making minimal payments on others. After paying off the lowest debt, the money goes to the next smallest loan, generating a “snowball” effect. This continues until obligations are paid. Dave Ramsey popularised the debt snowball concept in his financial counselling.
The debt snowball strategy helps debtors stay motivated by giving them instant wins as they pay off lesser bills. As debts are paid off, the freed-up money is transferred to the next loan, increasing the amount available for debt payments and speeding up the debt reduction process.
The debt snowball method may not save borrowers the most money on interest payments compared to other methods like the debt avalanche method (which prioritises debts based on interest rates), but it can be effective for people who are motivated by quick results and need a psychological boost to stay focused on debt repayment.
Debt Snowball Example
The debt snowball method is a debt repayment strategy where you prioritize paying off your smallest debts first while making minimum payments on your other debts, and then “snowball” the payments towards larger debts as you pay off smaller debts. Here’s an example:
Let’s say you have the following debts:
- Credit Card A: $500 with a minimum monthly payment of $25 and an interest rate of 18%
- Student Loan B: $2,000 with a minimum monthly payment of $75 and an interest rate of 5%
- Personal Loan C: $5,000 with a minimum monthly payment of $150 and an interest rate of 8%
- Car Loan D: $10,000 with a minimum monthly payment of $250 and an interest rate of 6%
Step 1:
List your debts in ascending order based on the outstanding balance.
Debt Snowball Order:
- Credit Card A: $500
- Student Loan B: $2,000
- Personal Loan C: $5,000
- Car Loan D: $10,000
Step 2:
Make minimum payments on all debts except the smallest one.
In this example, you would make minimum payments on Student Loan B, Personal Loan C, and Car Loan D, and put any extra money towards paying off Credit Card A.
Step 3:
Pay off the smallest debt aggressively.
Let’s say you can afford to pay $200 extra towards Credit Card A each month. You pay the minimum payment of $25 and an additional $200, for a total payment of $225 towards Credit Card A each month until it is paid off. Once Credit Card A is paid off, you move on to the next smallest debt.
Step 4:
Snowball the payments towards the next smallest debt.
Once Credit Card A is paid off, you take the total payment you were making towards Credit Card A ($225) and add it to the minimum payment of Student Loan B ($75), for a total payment of $300 towards Student Loan B each month. You continue making this increased payment towards Student Loan B until it is paid off. Then, you snowball the payments towards Personal Loan C, and so on, until all debts are paid off.
The debt snowball method helps you build momentum and motivation as you pay off smaller debts, which can keep you motivated to continue tackling larger debts. It’s important to note that while the debt snowball method focuses on the smallest debts first, it may not always be the most financially optimal strategy in terms of interest savings. However, it can be effective for those who are motivated by small wins and need the psychological boost of seeing debts eliminated one by one.
Advantages and Disadvantages of the Debt Avalanche Method
It’s hard to feel enthused about paying off debt, and if you don’t see any progress, you may give up too soon. Debt snowballs motivate. Fast results—eliminating certain outstanding amounts in only a few months—encourage you to remain with the strategy. That debt mountain doesn’t seem so insurmountable. It’s simple—just look at each debt, not interest rates or APRs.
The debt snowball’s main issue is cost. Balances above APRs may result in higher interest payments. Depending on the loans and interest compounding frequency, being debt-free may take longer.
Pros
- Builds incentives by quickly paying off debt
- Easily attainable
Cons
- Higher interest costs overall
- Getting into debt totally may take longer.-free
Must Read:Â Top 10 Best Places to Refinance Student Loans (2023 Review)
Debt Avalanche
The debt avalanche approach requires you to make the required minimum payments on all of your outstanding accounts, and then use any of the money that is still designated for your debts to pay off the account that has the highest interest rate first. You will spend the least amount of money possible on interest if you use the debt avalanche strategy.
Debt Avalanche Example
The debt avalanche method is a debt repayment strategy where you prioritize paying off your debts with the highest interest rates first, regardless of the debt amount, while making minimum payments on your other debts. Here’s an example:
Let’s say you have the following debts:
- Credit Card A: $5,000 with an interest rate of 18% and a minimum monthly payment of $150
- Student Loan B: $10,000 with an interest rate of 6% and a minimum monthly payment of $200
- Personal Loan C: $2,500 with an interest rate of 8% and a minimum monthly payment of $100
- Car Loan D: $15,000 with an interest rate of 5% and a minimum monthly payment of $300
Step 1:
List your debts in descending order based on the interest rate.
Debt Avalanche Order:
- Credit Card A: $5,000 with an interest rate of 18%
- Personal Loan C: $2,500 with an interest rate of 8%
- Student Loan B: $10,000 with an interest rate of 6%
- Car Loan D: $15,000 with an interest rate of 5%
Step 2:
Make minimum payments on all debts except the highest interest rate debt.
In this example, you would make minimum payments on Personal Loan C, Student Loan B, and Car Loan D, and put any extra money towards paying off Credit Card A.
Step 3:
Pay off the highest interest rate debt aggressively.
Let’s say you can afford to pay $250 extra towards Credit Card A each month. You pay the minimum payment of $150 and an additional $250, for a total payment of $400 towards Credit Card A each month until it is paid off. Once Credit Card A is paid off, you move on to the next highest interest rate debt.
Step 4:
Avalanche the payments towards the next highest interest rate debt.
Once Credit Card A is paid off, you take the total payment you were making towards Credit Card A ($400) and add it to the minimum payment of Personal Loan C ($100), for a total payment of $500 towards Personal Loan C each month. You continue making this increased payment towards Personal Loan C until it is paid off. Then, you avalanche the payments towards Student Loan B, and so on, until all debts are paid off.
The debt avalanche method helps you save on interest payments in the long run, as you are tackling the highest interest rate debts first. However, it may not provide the psychological wins of paying off smaller debts quickly like the debt snowball method. It’s important to choose a debt repayment strategy that aligns with your financial goals and motivates you to stay committed to paying off your debts.
Advantages and Disadvantages of the Debt Avalanche Method
The debt avalanche method can save hundreds of dollars in interest by rearranging your loan payoffs. The avalanche strategy can also cut debt payoff time by a few months for those with larger debt.
Debt avalanche is the ideal way to save money and time, but it has drawbacks. It needs discipline to put all your excess money towards a specific obligation, not just the minimum. If you lose motivation and skip a month or two of targeted repayments, the debt avalanche won’t operate.
Debt avalanche implies a fixed amount of discretionary income to pay down debts. An emergency or higher living expenditures might derail the strategy.
Pros
- Reduces the amount of interest that you must pay.
- Cuts down on the time it takes to pay off debt
- Good for those that value their finances
Cons
- To succeed, you need dedication and discipline.
- A consistent level of discretionary cash is needed
Conclusion
Debt snowball vs. debt avalanche? Ultimately, the choice between the debt snowball and debt avalanche depends on individual preferences, financial goals, and the specific circumstances of each borrower. Some may prefer the debt snowball method for its psychological benefits and quick wins, while others may prioritize the cost savings of the debt avalanche method. It’s important to carefully consider your financial situation, budget, and goals when deciding which method is best for you
Recommended:
10 Tips for Negotiating With Creditors to Reduce Debt
