Snowball vs Avalanche Method: Which is the Best Debt Paydown Strategy?
If you’re dealing with debt, you’re not alone. According to a 2021 study by Credit Karma, the average U.S. consumer has $52,940 in personal debt. But there are strategies you can use to tackle your debt and get your finances back on track. Two popular methods for paying down debt are the snowball and avalanche method. Here’s what you need to know about each one:
The Snowball Method
The snowball method is all about momentum. With this method, you start by paying off your smallest debt first while continuing to make minimum payments on your other debts. Once the smallest debt is paid off, you take the money you were putting toward that payment and roll it onto the next-smallest debt owed. As you roll the money used from the smallest balance to the next on your list, the amount snowballs and gets larger and larger, accelerating the rate of debt reduction.
The Avalanche Method
The avalanche method focuses on paying off the loan with the highest interest rate loans first. When the higher-interest debt is paid off, you put that money toward the account with the next highest interest rate and so on, until you are done. By focusing on the loans that are the most expensive to carry, in the long run, would effectively mean you should pay less over time with this method, as it addresses high interest first.
| Snowball Method | Avalanche Method |
|---|---|
| Make a list. Organize any payment information, total amount owed, minimum monthly payments and due dates. | Make a list. Organize any payment information, total amount owed, minimum monthly payments and due dates. |
| Sort them out. Arrange your list of accounts from smallest to largest dollar amount owed. | Sort them out. Arrange your list of accounts from the highest interest rate to the lowest interest rate on each bill. |
| Budget beyond the minimum. Determine how much extra you can afford to put toward the monthly minimum payment for your smallest debt, after paying the minimum payments on all of your other outstanding debts. Remember, if you do not have enough for even the minimum on each of your debts, it can hurt your credit score. | Budget beyond the minimum. Determine how much extra you can afford to put toward the monthly minimum payment for your highest interest rate account, after paying the minimum payments on all of your other outstanding debts. Remember, if you do not have enough for even the minimum on each of your debts, it can hurt your credit score. |
| Roll over payments as you make progress: When you’ve paid off the smallest debt, take the money previously used — the monthly payment and the little extra you budgeted — and put it toward the next-smallest debt. | Roll over payments as you make progress: When you’ve paid off the account with the highest interest rate, take the money previously used — the monthly payment and the little extra you budgeted — and put it toward the next-highest interest rate account debt. |
Perfecting Your Debt Paydown Strategy
Perfecting your debt pay down strategy involves taking steps beyond just choosing a method and making payments. Here are some additional tips to help you achieve your goal of becoming debt-free:
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Build an emergency fund: It’s important to have a safety net in place before you begin a debt pay down method. While it’s good to want to become debt-free, having funds to rely on in case of situations like an unexpected medical bill or car repair should be a priority.
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Stay up-to-date on all of your current bills: Don’t start either the avalanche or the snowball method if you are late on payments, as this will only complicate your debt situation. Contact your lenders to discuss possible options to prevent late payments such as adjusting the payment due date.
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Track your spending: Be careful not to charge up additional debts while you are working to pay down your debt. Track your spending to ensure you stick to your budget. Take note of how your credit score changes. Paying down your debts may help improve your score over time.
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Stay focused on your end goal: As you work on your chosen debt pay down strategy, remember to stay focused on your end goal. With the snowball method, you will enjoy those little wins and use them as motivation to keep going. If you are analytical and patient, the avalanche method may be the method for you. With the avalanche method, it may take longer to roll over to your next account but if you have larger balances with higher interest rates and you stick to the plan, it should save you in the long run.
How to Choose the Right Method for You
- The right debt pay down method depends on personal financial situation, goals, and mindset.
- The avalanche method is the most cost-effective for paying off debts with varying interest rates.
- The snowball method is more motivating if you have many smaller debts and want to see quick progress.
- Consider personality and approach to financial management.
- The avalanche method is a better fit for those who prefer structure and clear goals.
- The snowball method is more suitable for those who need immediate gratification and motivation.
- Choose a method that is easy to stick to and helps achieve financial goals.
Conclusion
In conclusion, both the snowball and avalanche methods can be effective ways to pay off debt, depending on your financial situation and personal preferences. The snowball method is a good option if you have a lot of smaller debts and need motivation to see progress quickly. The avalanche method is better if you have multiple debts with varying interest rates and want to save the most money over time. Ultimately, the best approach is to choose the method that works best for you and your financial goals, and to stay committed to paying down your debt over time. With patience and perseverance, you can become debt-free and achieve greater financial freedom.