When you want to become debt free, there is a strategy that will mathematically help you achieve your goal faster. When you want to stick with the plan and finish the program, then an alternate method may work better for you.
When we analyze the most popular debt payoff strategies, the debt avalanche and the debt snowball, both strategies have successfully assisted millions of people to eliminate their debts, but they do it in slightly different ways to achieve the same goal.
Instead of trying to find out which method will be best for you, let’s first start with an unexpected location – the end result.
Your goal should be to have all of your debts eliminated (not to include a mortgage) but to also have more money available to you each month as you continue to pay off debts.
Every time that a debt is removed from your financial system, you will also eliminate the minimum monthly payment for that debt. This excess amount of cash can be used to pay the next debt, and this process will make debt repayment faster over time.
Think of this process as creating momentum for your financial system. As debts are eliminated from your financial system, the available cash flow each month continues to increase, and thus, makes it easier to eliminate any remaining balances.
The snowball approach is a relaxed and slow way of paying down debts. It allows individuals to see progress early on by paying off small debts first.
Making this change to your budget can build momentum. You don’t have to worry about interest rates, as the debt snowball strategy will keep you focused on the little wins until they become bigger.
- List all your debts (excluding your mortgage).
- Order your debts from smallest to largest.
- Pay the minimum payment on all of your debts.
- Apply every available extra dollar to the smallest debt.
After you pay off the smallest debt in full, turn around and move the amount you were paying toward that debt into the next debt on your list until you pay off all of your debts.
You will build momentum from each time you pay off a debt.
Think of a snowball rolling down a hill. At first it is very small, but as it rolls down the hill, it picks up a lot of extra snow because it’s rolling into and collecting other things along the way (increasing in size rapidly).
Making payments towards your debt will give you small amounts of assistance at first. However, over time you will eventually have large amounts of money to apply towards paying down your debt.
Once again, the Debt Avalanche is very similar to debt snowball, but the main difference between the two is the order in which you will pay off your debts (using the avalanche method, you will pay the debts in order of highest to lowest interest).
The procedures below are similar to the other:
- Make a list of the debts that you have (excluding the mortgage)
- Order the debts by interest rate, highest first.
- Put any extra funds on the debt with the highest interest rate until it is paid off.
Once the first debt is completely paid off, the extra payment will go to the debt with the second highest interest and so on.
The debt avalanche pays off debt in the most cost-effective manner by reducing the total amount of interest paid, thus reducing the amount of time it takes to pay off all debts.
The cash basis of the debt avalanche method makes it the fastest and most efficient method of paying off debt.
So having determined that mathematically, the debt avalanche tends to save people more cash in the long run due to the way it targets highest interest debts, this method provides more benefits to consumers.
If a computer program were created to determine the quickest way to pay off multiple debts, it would suggest this method, as well.
Here, you will find out how personal finance is related to our emotions and how we deal with those emotions when we are dealing with finances.
Project motivation may be lost by some; for others it occurs through distraction while yet others quit entirely, leaving only completed projects behind, this means that while a plan looks great on paper it might not help in execution.
This is where the debt snowball can shine. Paying off your smallest debts first will mean you’ll get results quickly. The first time you pay off one of your small debts may only be a few dollars; however, removing it from your list can give you a significant amount of emotional satisfaction.
Each small balance you eliminate provides you with evidence that the debt snowball is working.
The evidence can serve as motivation to continue to eliminate the debt until there is no debt outstanding.
In certain instances momentum may matter more than the mathematics involved in creating the momentum.
When Each Method Could Work
In many cases personalities can dictate which plan will work best for you.
If you are a very organized and driven individual that has a finely tuned focus on efficiency you will probably gravitate towards the avalanche method because you will be comfortable with the idea of going several months before you see an initial success, but you know in the long run you will save money by doing so.
In comparison, individuals motivated by seeing their debt eliminated as fast as possible may benefit best from the debt snowball method because they will see their balance eliminated sooner, developing self-confidence and positive habits.
Neither method is wrong; however, it is crucial for you to use the method that you have a greater likelihood of continuing with.
Both methods are combined by many people.
For instance, a person could use the snowball strategy to pay off a lot of smaller debts and get rid of a lot of the smaller debts first so there’s less to pay off in total and can build some momentum.
Then, once he/she has eliminated those smaller balances, they may use the avalanche method for all of the larger balances left owing, thereby reducing the amount of interest being paid on them.
Together, these methods blend psychology and efficiency in getting out of debt.
What is really more important than which strategy is used is actually implementing it consistently, regardless of whether you use either the snowball or avalanche approaches or both.
The accumulation of dollar after dollar being applied to debt will shorten the amount of time remaining until it is paid off, and each one that is paid off adds to the amount of freedom you will enjoy once you have no debt left.
Once you have made your final payment, all that will matter is that you’ve achieved your goal of being debt-free, and the difference between these two approaches will be negligible.
