Snowball vs Avalanche Method
Feeling anxious and overwhelmed about paying off your debt? You are not alone! While the idea of paying off your debt can seem daunting at first, it’s possible for anyone to achieve! There are hundreds of ways to go about paying off debt, however having a plan is the most important part. In this post you will learn the difference between the snowball vs avalanche method and which one is best for you.
When it comes to paying off your debt, choosing the right repayment strategy can make all the difference! The snowball vs avalanche method is a long standing debate of the two most popular methods to pay off debt. While both focus on becoming debt free, there are different processes. The snowball method focuses on paying off your smallest debt amount first and working your way towards your higher payments. The avalanche method is prioritizes on paying off your highest interest rated debt first and tackling the rest after this. Lets explore the snowball vs avalanche method and discover which is best for you!
Snowball
The snowball method uses extra income to pay off your smallest principle debt first. Once you pay off this debt, put its monthly payment towards the next smallest debt amount.
Example:
Emily has credit card debt of $15,000 with an interest rate of 25%. A car loan of $25,000 with an interest rate of 12%. Finally, a student loan amount of $10,000 with a 7% interest rate.
Utilizing the snowball method, Emily would focus on the smallest principle debt amount first. In this case, she needs to pay off the student loan of $10,000 first. Once Emily has paid this off, she then puts all the money she was using to pay off her student loans towards the $15,000 in credit cards, the next lowest debt amount. For the sake of example, lets say Emily is putting a total monthly payment of $250 towards her student loans. Once the student loans have been paid off, she then puts the $250 from her monthly student loan payments as an additional payment to her monthly credit card payment. Once the credit card is paid off, she now takes the accumulated monthly payments of the student loans and credit cards. This will go towards her now, final and highest principle debt – the car loan of $25,000.
It is important to note that the snowball method is based solely on the principle amount of the debt. It does not take into consideration the interest rate or monthly payment amount.
Pros of the Snowball Method:
- Motivation: It is easier to stay motivated as you pay off small debt quicker, seeing faster wins.
- Implementation: The snowball method is easier to get started than the avalanche method. All you need to know is the principle debt amounts, the interest rates and monthly payments are irrelevant.
Cons of the Snowball Method:
- Long Term Savings: You will pay higher amounts in interest over time. Since the snowball method focuses on the principle debt amounts, rather than the highest interest first.
- Length of Time: Generally, the snowball method takes a longer time to get out of debt than the avalanche method. This is mainly due to putting more money towards interest.
Avalanche
The avalanche method focuses on paying off your debt with the highest interest rate first. This will save you a higher amount of money over time, as you are paying less money in interest. Once you pay off the highest interest debt, you then take that money and put it towards the next.
Example:
Emily has credit card debt of $15,000 with an interest rate of 25%. A car loan of $25,000 with an interest rate of 12%. Finally, a student loan amount of $10,000 with a 7% interest rate.
Utilizing the avalanche method, Emily would start with paying off her credit card debt first, as it has the highest interest rate of 25%. Once this is paid off, she will put that money as an additional payment to her car loan each month. For the sake of example, lets say Emily puts a total monthly payment of $400 towards her credit card debt. Once she pays off this debt, she then takes that $400 monthly payment and puts it towards her car payment each month. So on and so forth, until the car is paid off. Finally, she puts the accumulated monthly payments of the previous credit card and car debt, toward her lowest interest rated debt, which in this case is her student loans.
Please note that the avalanche method prioritizes paying off loans with the highest interest rates first. The principle loan amount and the monthly payment are irrelevant in this case.
Pros of the Avalanche Method:
- Long Term Savings: You will save more money in interest payments over time and reduce the total amount of money you pay in the long term.
- Length of Time: Generally, the avalanche method gets you out of debt faster than the snowball method.
Cons of the Avalanche Method:
- Discipline and Motivation: The avalanche method requires more discipline as it is a bit harder to stay motivated and takes longer to pay off the first loans.
- Interest Rates: The avalanche method focuses on high interest rates rather than principle loan balances.
One of the best ways to secure your future is to embark on the journey of becoming debt free. It may seem overwhelming at first, as it is a shock for everyone when they sit down and take a hard look at their finances. Although it is not easy, it is possible for anyone to become debt free! Learning about the snowball vs avalanche method is a great first step in becoming debt free.