Debt Snowball vs Debt Avalanche

Debt Snowball vs. Debt Avalanche Method

Debt snowball and debt avalanche are 2 simple ways to pay off debt. Financial guru’s claim that the debt snowball method is the best way to get out of debt but quite frankly, there are pros and cons. Let’s take a look at both…

Debt snowball method – How does it work?

The Financial guru Dave Ramsey has formulated and popularized the debt snowball method for several years. He feels that the debt snowball is the best method to repay unsecured debts since it gives a big psychological boost.

In the debt snowball method, you pay off debts in the ascending order. This means you start paying off debts from the lowest balance to the highest balance.

Example:

You have 4 credit cards.

Outstanding balance Interest rate

Credit Card A – $2000 15%

Credit Card B – $3000 16%

Credit Card C – $4000 17%

Credit Card D – $5000 18%

In a debt snowball method, you make the minimum monthly payments on all your credit cards. But you pay an extra amount on the Credit Card A every month till you get rid of it. After you pay off the Credit Card A, you roll over the amount to the Credit Card B.

Suppose, your minimum monthly payment amount for the Credit Card A was $500. You were paying $200 extra for Credit Card A. After you get rid of it, you’ll pay an extra $700 ($500+$200) on the Credit Card B.

If your minimum monthly payment amount for the credit card B is $550, then you’ll pay $1250 ($500+$200+$550) for the second credit card every month. You have to repeat this process until this card is paid off.

Continue this process till you pay off all your credit cards.

Pros

It motivates you to stick to the plan

It gives you quick wins

Cons

You can lose lots of money on interest

It may take a lot of time to get out of debt

Debt avalanche method – How does it work?

The debt avalanche method is completely different from the debt snowball method. In this method, you pay off debts in the descending order. Here you pay off the highest-interest debt first.

The method requires you pay off the highest-interest debt first while making the minimum monthly payment on all your loans.

Let’s take the first example yet again.

You have 4 credit cards.

Outstanding balance Interest rate

Credit Card A – $2000 – 15%

Credit Card B – $3000 – 16%

Credit Card C – $4000 – 17%

Credit Card D – $5000 – 18%

Here, you’ll make minimum monthly payments on all the 4 credit cards. But you’ll make an extra payment on the Credit Card D every month till you get rid of it. Once you get rid of the highest-interest debt, shift your focus to the Credit Card C.

Your minimum monthly payment for the Credit Card D – $800

Your minimum monthly payment for the Credit Card C – $700

You were paying an extra $200 on the Credit Card D

So in total, you were paying $1000 on the Credit Card D

After you pay off Credit Card D, you’ll pay $1700 ($700+$800+$200) for the Credit Card C till you clear the debt.

Pros:

You can save a lot of money on the interest

Cons:

It can be difficult to stay motivated

Who is the winner?

There is no clear winner. Debt snowball gives you quick wins. It helps you start paying off debts from lowest balance and build momentum gradually. You get a psychological boost. On the other hand, debt avalanche method helps you save thousands of dollars by tackling highest-interest debt first. This is a big advantage.

I would suggest you to use an online debt payoff calculator to decide which method is the best for you. Find out the following details: (a) how much you can save in total if you get rid of the highest-interest debt first (b) how long it would take to pay off your highest-interest debt (c) how long it would take to repay your smallest balance (d) how much you can save in total if you follow the debt snowball method. Analyze all the figures carefully and then choose a method.

There is no right or wrong method when it comes to paying off debt. Sometimes, you can combine both the methods and create a new method to get out of debt. The choice is yours. If the new method suits your financial situation, then use it to pay back your creditors. Just stick to the plan, be patient and consistent. You’ll be debt free soon

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