Paying off debts is not easy; especially when they start accumulating. There are two main methods usually used to help get you out of debt; the snowball method and the avalanche method. Understanding how each work will help you determine what’s best for your current situation.
Difference between Debt Snowball And Debt Avalanche Methods
The Debt Snowball method dictates that you pay off your smallest debts first before tackling the bigger debts. The logic behind this is that, by clearing off the small debts entirely, you can commit the money being used on partial payments towards the small debt, and use it to add onto payments towards larger debts. This would in turn help reduce the amount and time it will take to clear the larger debts. The idea is that once you realize you’re free from the small debts, you get motivated towards working on tackling the bigger ones.
The Debt Avalanche method, on the other hand, involves paying off the debts with the highest interest rates first. The logic here is that the higher the interest on a debt, the more money you’ll pay accumulatively. Smaller debts often have lower interest rates and so less accumulative amounts. The Avalanche method demands major sacrifices to the lifestyle with the objective of surviving short-term discomfort for long-term financial freedom.
How Do They Work?
Let’s look at a practical example of how you can put both the Debt Snowball method and avalanche method to work.
Suppose you have four debts worth: $200, $500, $5,000 and $8,000 and the $5000 and $8,000 dollar debts have higher interest rates. The snowball method would advocate that you pay off the $200 and $500 dollar debts first and then begin tackling the larger debts. If you are able to pay the small debts in one or two payments, then that means that the interest accrued on the larger debts will be less because it will take a short time before you start making larger payments to that. However, if you take say 5 months to clear the $200 and $500 debts while making minimum payments to the larger debts, eventually, you’ll have paid much more from interest accrued on both ends.
In the same situation, if you go for the avalanche method, you’ll focus on clearing the larger debts with higher interest rates. This means that you’ll clear off the larger dates faster, reducing accrued interest. Once you’re done with the high-interest debts paying off the smaller debts is always easier.
Which Is The Best Method For You?
Before settling on a method you first need to analyze your debt situation. How much do you owe and what is the interest rate on each debt amount? How much can you afford to commit towards paying each debt and over what duration of time?
Next, do the calculations and see which option will save you money and cut down on the time it will take for you to be debt free.
Some experts advise that you use both methods to help clear your debt. That way, you get to enjoy the rapidity and savings of the avalanche, while getting the emotional inspiration obtained in the snowball method.