Most people in the developed world end up in debt, whether through student loans, credit cards, car loans, or mortgages before they understand or are good with money.
When a decision is finally made to tackle debt, you realise there are several options, and you may then wonder, “Which one do I pay first?” Depending on who you ask, it’s going to be debt avalanche vs debt snowball.
This post will explain these concepts and help you decide what to do about them.
This means making extra payments on your debts and choosing the first debt to put the extra payments toward. With the debt avalanche method, you start with the highest-interest debt and go down to the one with the lowest interest rate debt.
You rank all your debts in order of interest rates, from highest APR to lowest. Then, you start paying more on the debt with the highest interest rate while keeping the minimum payments on all others.
When you pay off that debt, you put all its payment toward the next debt with the highest interest rate. You keep doing this until you pay off all of your debts.
For Example. Joey has four debts
From the above example, after making the minimum monthly payments on each loan and budgetting, he has £250 each month for extra payments.
This means he will put the extra money of £250 toward the credit card debt of £4,000 until it’s paid off, then switch all its payments (extra and monthly payments) to the personal loan of £1,700, which is the next highest interest rate.
Here are some good things about it:
The cons of the debt avalanche method
You should consider the debt avalanche method
This entails making extra payments on your debts, beginning with the smallest debt.
In contrast to the avalanche method, you list all your debts from the smallest to the largest balance, then you apply the extra funds starting from the smallest debt to the next smallest debt all the way to the largest debt while maintaining the minimum payments on all debts.
The idea is that attacking debt from the smallest amount will give you quick wins and motivate you to keep paying off the entire debt, hence the name snowball; you start small, gather momentum, and grow larger.
An Example of Debt Snowball method
Joey has the following debts
Using the same example, let’s say Joey wants to pay off his debt using the debt snowball method. After making the minimum payments on each loan, he still has £250 left over.
So he will put the extra cash of £250 toward the personal loan with a balance of £1,700 until it is paid off, then put all payments toward the second smallest debt.
It’s important to think about the pros and cons. Among the pros of the debt snowball method are:
On the other hand, some disadvantages of the debt snowball method are:
Whether you use the debt avalanche or snowball approach, you will pay the minimum monthly payment on all your debts. Which debt you should focus on paying off after those minimums is where they differ.
The debt snowball strategy focuses on paying off the smallest debts first, while the debt avalanche strategy focuses on paying off the debts with the highest interest rates first.
Debt avalanche vs debt snowball. Which method should you employ, then? Or which method is the best way to pay down debts? Ultimately, there is no single correct response.
Despite the mathematical advantages of the debt avalanche method, the debt snowball has gained popularity as people realise the significant impact of psychological factors on their personal finance.
To improve our financial situation, we need more than just access to more information, even though we now have access to more information than ever before.
We must first examine our relationship with money to overcome our money troubles. Then, read books like “Psychology of Money” and “My Favorite Money Mammoth” to better grasp the psychological impact on your finances
Regardless of which method you choose, the bottom line is you will eventually be debt-free.
If you’re struggling to make minimum payments, then all these discussions about debt avalanche vs debt snowball might not be very helpful.
Remember that you’re not alone, we have got articles below to help but professionals are also available to provide a free, individualized answer.
Organizations like Citizen’s advice, Step change, National debtline, Christians Against Poverty.
