Different debt payoff strategies exist, and avalanche and snowball methods are the most popular. These two debt payment methods have the same goal of finishing your debts; however, they take different routes. If you are thinking about the best method, it will depend on how you prioritize your debts and your financial goals.
Do you want to bring down the number of debts first or eliminate the debts with the highest interest rates first? Know about these two approaches and take your pick wisely. Let us begin knowing about them individually.
What Is the Debt Snowball Method?
According to the debt snowball method, you should pay your smallest debts first or the ones with the lowest debt amount. After finishing off that debt, you can proceed towards the payment of the next smallest debt. This will keep you going until you pay off each debt.
Steps to Pay Off Debt Using the Snowball Method
Here is how to pay debts using this method:
Step 1:
Firstly, it is essential for you to make a list of all the pending debts you have, with the debt amounts written on it.
Step 2:
Now, you have to arrange all the small and big debts in the ascending order. You should take your smallest debt at the top and the one with the highest balance at the bottom of the list.
Step 3:
Now, make a plan for paying the debts in the order they are written. To do so, you should consider paying additional funds every month to finish off the debt. At the same time, it is also important to keep paying the EMIs of other debts, too, like every month.
Step 4:
Now pay the second one lowest debt amount. You can use the same strategy of paying more than a minimum amount every month to finish off the next smallest debt.
Step 5:
Keep going in the same momentum until you reach the end of the list and have paid off all your balances.
Debt Snowball Method: The Benefits
Here are some of the best benefits of this type of debt payment approach.
- Quick Results
Since it is easier to pay the smaller amounts first, you will be pleased with quick results. This momentum of quickly finishing off the debts will keep you going and inspire you to pay other smaller debts too.
- Easy to Implement
It is simple to order your debts in ascending order based on your debt balance. You just need to have a list of all your debts along with their amounts.
- Builds Savings
Since you are able to pay off your debt more quickly, you can save its interest and ensure savings.
Debt Snowball Method: The Drawbacks
The limitations of this type of debt payment approach include.
- Does not Save Interest Amount
Since the debt snowball method focuses on lowering the number of debts by paying the smaller one first, it does not aim to lower the interest rate. Since this debt payment method does not consider interest rates, it may mean that the borrowers will end up paying a higher interest amount.
- Doesn’t Consider Other Factors
Other than the interest, the debt snowball method does not include other important reasons. For example, if you have a loan with a variable interest rate that you think is going to rise in the future, you should pay off that debt at the earliest.
- Longer Term
When you don’t pay the high-interest debts first, it will not lower your interest and amount. This will take longer to pay all your debts using a snowball debt payment strategy.
What Is the Debt Avalanche Method?
The debt avalanche method proclaims paying debts according to their interest rates. Unlike the debt snowball method, the avalanche strategy prioritizes those debts that have a higher interest rate. Firstly, you may repay the highest cost debt and then proceed to another.
Steps to Pay Off Debt Using the Avalanche Method
Here is how to pay debts using this method:
Step 1:
Firstly, it is critical for you to make a list of all the debts, with the debt interest written on it.
Step 2:
Now, you have to arrange all the debts with their interest rates in descending order. You should take your debt with the highest interest rate at the top and the one with the lowest interest rate at the bottom of the list.
Step 3:
Now, make a plan of paying the debts in the order of their interest rate. When you try paying more than a minimum balance every month to finish off the debt, keep paying the other debt EMIs, too, to prevent collecting more debt.
Step 4:
Now pay the second-highest interest debt. Like the snowball method, use the same strategy of paying more than a minimum amount every month and finishing off the next highest-rate debt.
Step 5:
Keep going until you reach the end of the list and have paid off all your balances.
Debt Avalanche Method: The Benefits
Here are some of the best advantages of this type of debt payment approach.
- Saves Interest
One of the main reasons people prefer this debt payment method over snowball is that it allows you to save interest. When you pay off your highest-rate debts first, it lowers the interest amount in the long run. So, you save more money in the overall loan amount than snowball method.
- Saves Time
When you save interest and reduce the overall loan amount, you will pay your dues earlier than scheduled. So, the avalanche approach helps you pay off your loans fast.
Debt Avalanche Method: The Drawbacks
Here are some of the cons of this type of debt payment approach.
- Gratification is Missing
Since it will take time to pay the debt with high interest, it may not offer instant gratification like the snowball method. This may demotivate you in your quest to become debt-free.
- Doesn’t Consider Other Factors
Just like the debt snowball method, this method also does not consider other important factors.
Wrapping Up
Depending on your financial goals and situation, you can choose snowball vs avalanche method. You can also apply for a personal loan that has a lower interest rate than your debts like credit cards to pay debt. While selecting the debt payoff method for yourself, analyze what can keep you going, allow you to save money, and help you reach your goals faster.
FAQs
Q1. What are the two popular approaches to debt payoff?
Ans. The two popular approaches to paying down your debt include the snowball and the avalanche methods.
Q2. What is the snowball debt payment method?
Ans. The snowball debt payment method allows you to pay small debts first, and then move to another smaller one.
Q3. What is the avalanche debt payment method?
Ans. This method focuses on paying high-interest debts first to ensure maximum savings.
Q4. What is the difference between the debt snowball v/s avalanche payment method?
Ans. While the snowball method focuses on paying small debt balances, the avalanche debt payment method focuses on finishing off the high-interest debts first.
Q5. Which is the best method: Snowball or Avalanche?
Ans. Since each method has its benefits and drawbacks, you need to decide the same according to your debt situation and financial goals. You can combine these two methods too.