Debt Avalanche or Debt Snowball Method: Which Is Better?
When it comes to accelerated debt payoff, there are two popular methods that many people use: one is the debt avalanche method, and the other is the debt snowball method. In this article we are going to talk about the relative advantages of the debt snowball versus the debt avalanche method and which might be better for your own financial situation.
According to a report by CNBC, the average American now has about $38,000 in debt, not including the mortgage. That is a lot of personal debt! And as reported by USA Today, the average American household also had an average of just over $137,000, as of November 2017. If you have a significant amount of debt, as the average American does, then using the debt snowball method or the debt avalanche method to get that debt out of your life as quickly as possible is a wonderful thing to do! So let’s look at these two debt payoff methods.
The Avalanche Debt Payoff Method
The avalanche debt payoff method is where you list your debts, not including the mortgage, in order from highest interest rate to lowest interest rate, and you start attacking them in that order. If you are a math nerd or are particularly interested in numbers and seeing the gains from paying off the higher interest rates is what will best help to keep you motivated, then use this method. Mathematically, this is the method that will save you the most money because you will be getting rid of the debt with the highest interest first.
So let’s imagine that you have a credit card with $2,400 in debt and 15% interest rate, a student loan for $8,000 with 4% interest rate, another credit card with $4,900 in debt at 18% interest, and a medical debt for $700 at 5%. This is what you would do:
You would pay everything that you could (the minimum payment plus any additional money that you can find in your monthly budget) toward the debt with the highest interest rate—in this case, the second credit card.
You would then make minimum payments on the rest of your debts.
Then, once that debt with the highest interest rate it paid off, you would take the money that you were putting toward that debt and add it to the minimum payment that you were paying on the debt with the second highest interest rate. In our example, that would be the first credit card. Then pay that debt off as quickly as possible. One great way to pay debt off as quickly as possible is to increase your income!
After the second debt is paid off, you would take the money that you were paying toward the second debt and add it to the minimum payment of the debt with the third-highest interest rate until it is paid off. In this case, that would be the medical debt. Again, try to pay it off as soon as possible.
And then when the medical debt is paid off, you would throw all of the money you had been paying on it toward the student loan debt, the last debt with the lowest interest rate.
Again, the benefit of the avalanche method, as illustrated in this example, is that you work to pay the debts with the highest interest rates off first. This can save a significant amount of money by getting those high-interest rate debts out of your life as soon as possible.
The Snowball Debt Payoff Method
The snowball method of paying off your debt, on the other hand, is where you list your debts smallest to largest and you begin paying them off one by one in that order. This method can be very effective (it’s the method we used to pay off more than $60,000 of debt) because it allows you to more easily see that you are making progress and you can get a lot of quicker wins if you have small debts that you can pay off first. By paying off the small debts quickly, you can get really good traction. This can help you to stay motivated to keep attacking your debt and to get it paid off.
If we use the same example amounts that we had above, then using the snowball method, this is what we would do:
First, we would pay off the medical debt because it is the debt with the smallest balance. We would put as much money as possible toward that $700 medical debt, and then we would pay minimum payments on all other debt. We would try to get that first debt paid off in just a few months (or less!), if possible.
After the medical debt was paid off, we would take the money we were using each month to pay off that debt as well as the money for the minimum payment for the first credit card—the one with the $2,400 balance—and work to pay off that debt next.
As soon as we could get that debt paid off, we would work on attacking the second credit card—the one with the $4,900 balance. We would take the money that we had been paying each month toward the first credit card and add it to the second credit card payment in order to get that debt paid off as soon as we could.
And then finally, once the second credit card was paid off, we would take the money we were paying each month toward that second credit card, plus any other money we could find in our budget above that, to pay off the student loan as quickly as possible. Because it was the largest debt it is the one that would be paid off last. But after it was paid off, we would be debt free!
Again, because of the fact that you are able to pay individual debts off more quickly with the snowball method, that is the debt payoff method that I would generally recommend. However, if the biggest motivating factor for you will be to get those high-interest payments out of your life, then go with that method. Use whichever method will help you stay motivated and committed to get completely out of nonmortgage debt as soon as possible.
Find more information on how to get (and stay!) out of debt here.
If you are serious about getting out of debt, then choosing either the debt snowball method or the avalanche can help you to reach that goal. Getting out of debt (completely out of debt) and staying out of debt is an awesome goal! When you get out of debt, you free up your income so that you can use it to amazing things like save for emergencies, give to causes you care about, make large purchases with cash, help those in need, go on amazing vacations, buy stuff you want without any payments, and so much more! The peace and financial freedom that come from getting out of debt are pretty incredible!
Which method do you feel would be your best option for getting out of debt? Or which option have you used in the past? Leave a comment below and let me know! I would love to hear your opinion or your experience!
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