Debt Snowball Vs. Debt Avalanche

Debt Snowball Vs. Debt Avalanche– Which is best for you?

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So, you’re ready to pay off your debt—excellent!

Whether you’re just getting started, or getting frustrated by not seeing the impact you’ve been working towards, we’re here to help offer some debt reduction tips.

First thing’s first—Strategy

Like any goal, you should have a solid financial strategy to pay off your debt. You’ve probably heard the terms debt-snowball or debt-avalanche thrown around, but you might not be sure what these mean or which method is right for you. Let’s break them down!

The Debt Snowball Method

The debt snowball method is a debt reduction strategy where you pay off debt in order of smallest to largest. When the smallest debt is paid in full, you roll the money you were paying on that debt into the next smallest balance.

It looks something like this:

Step 1: List your debts from smallest to largest regardless of the interest rate.
Step 2: Make minimum payments on all your debts except the smallest.
Step 3: Pay as much as possible on your smallest debt.
Step 4: Repeat until each debt is paid in full.

The idea behind this method is that the more money that you free up by paying smaller debts the more you can contribute to paying down larger ones. The more debts you clear out the more motivated you will feel to accomplish your goal and live a debt-free lifestyle!

The Debt Avalanche Method

In the debt avalanche method, you pay your debts from highest interest rate to lowest interest rate, regardless of balance. This method may save you time and require you to pay less interest in the long run.

What this would look like:

Step 1: Add up all the minimums you must pay on your debt — ordered from the highest interest rates to lowest.
Step 2: Calculate how much extra you can pay beyond the total of your minimums.
Step 3: Tackle debts one-by-one and continue rolling those minimum payments into your next extra debt payment amount until all debts are repaid.

While the math is on your side with the avalanche method, you may not feel the triumph of zeroing out a debt for a longer period of time.

So, Which Should You Use?

The answer– whichever is most compatible with your lifestyle and mindset. If you are the type of person who is motivated by accomplishment, the Debt Snowball is your thing.  But, if you can’t sleep at night because of those high-interest charges, then give the Debt Avalanche a try. At the end of the day, if you are making a conscious and diligent effort at paying down debt you are on the right track.

The most important starting point for any Debt Reduction process is to have a $1000 Emergency Fund before you start.  That will keep you from creating more debt, when an emergency arises (and they always do), by utilizing the money in the Fund. Put your plan on hold until you replace the money used for the emergency, then return to the Debt Reduction Plan.

As always, our team is here to help! Get in touch with one of our advisors to help guide you on your path to financial wellness.

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