Choosing between the debt snowball method and the debt avalanche method

The Debt Snowball Method

Let’s say you have multiple debts. Some larger than others. If you were to use the debt snowball method to pay them off, you would first focus on paying the smallest debts while you continue making minimum payments on your other debts. Once you pay off the smallest debt, you take the amount of money you were using to pay it off and apply it to the next smallest debt.

The amount of money you will be applying towards debt repayment will gradually increase over time creating a ”snowball” effect.

How can you apply the debt snowball method in your debt repayment?

1. Make a list of all your debts. List out your debts. Include the name of the creditor, the balance owed and the minimum payment you are required to make.
2. Next you need to order your debts from the smallest to the largest based on the balance owed.
3. Focus on paying off the smallest debt. Allocate as much extra money as possible towards paying off the smallest debt. While you are doing this don’t forget to make minimum payments on all your other debts.
4. Once your smallest debt is paid off, take the money you were using to pay it off and apply it to the next smallest debt.
5. Continue the process paying off one debt at a time, gradually working your way up to the larger debts until you pay off all your debts.

Benefits of using the debt snowball method for debt repayment

1. Simplified debt repayment process

You will be focusing on paying one debt at a time. This makes the pocess easier to manage. Tracking your progress will also not be an issue.

2. Helps you build momentum

As you continue crossing off the smallest debts from your list, you will be applying the money you were using to pay them off towards other larger debts. This will help you build momentum that will help speed up your debt repayment process.

3. Gives you a sense of accomplishment

You will be crossing off the smallest debts from your list. These are the small wins that come a long way in giving you the motivation you need to continue with your debt repayment. Every small debt you cross off makes the path towards a debt free life clearer. This is the roadmap to your debt free life.

4. Improves your credit score

As you pay off your debts one after the other, your credit utilization ratio lowers. Credit utilization ratio accounts for 30% of your credit score therefore using the debt snowball method will positively impact your credit scores.

The key to this method is focusing on the psychological benefits of paying smaller debts first. As you achieve the small victories along the way, you’ll feel a sense of accomplishment that will help you stay motivated in your debt repayment journey.

Disadvantages of the debt snowball method

It is always important to weigh the benefits and limitations of anything before deciding to use it. Now that we’ve talked about the pros, it is important that we also mention the cons.

1. May not be the most cost-effective

Focusing on paying your debts from the smallest to the largest rather than prioritizing high interest debts may not be the most cost-effective strategy when it comes to minimizing interest payments.

2. May not work for all types debt

The debt snowball method is most effective for unsecured debt like credit card debt and personal loans. It may not be as effective for secured debts like mortgages and car loans.

If you decide to use the debt snowball method you need to be disciplined and
committed. You may find it challenging if you struggle with self discipline.

The Debt Avalanche Method

Here, you make minimum payments on all your debts while directing any extra money towards paying off the debt with the highest interest rate. Once you pay off this debt, you move on to the debt with the next highest interest rate. You continue this process until you are debt free. The goal is to minimize the amount of money you spend on interest over time.

How can you apply the debt avalanche method in your debt repayment?

1. List out all your debts. Include the total balance owed and the interest rate for each debt. You also need to determine the minimum payments required for each debt.
2. Identify the debt with the highest interest rate. This is the debt you will focus on paying off first.
3. Make minimum payments on all your debts then allocate any extra funds(money from budget surplus, a raise at work or any additional income) towards the debt with the highest interest rate.
4. Once you complete paying off the debt with the highest interest rate, move on to the next one with the highest interest rate. Continue the process until you are debt free.

Minimum payments: The payments you must make each month to avoid late fees
and penalties.

Advantages of using the Debt Avalanche method for debt repayment

1. Cost effective

The debt avalanche method is the most cost-effective debt repayment strategy. This is because you minimize the amount of interest that accrues on your debt over time. This saves you a significant amount of money in interest charges.

2. Faster debt repayment

You will be minimizing the amount of interest accruing on your debts. This will speed up your debt repayment process than if you were paying them off based on balance size or randomly paying them.

3. Improved credit score

Paying off your debts lowers your credit utilization ratio which is an important factor in the calculation of your credit score.

Like the debt snowball method, debt avalanche method requires commitment and discipline to stick to. Therefore, you need to develop better financial habits. Create a budget, save on things shopping and energy bills, build an emergency fund, avoid new debt and effectively manage your debt.

Disadvantages of using the debt avalanche method

1. Focusing on paying the debt with the highest interest rate can take you longer to see progress unlike the debt snowball method. This may not be motivating and can make you discouraged but you need to keep going. You will see progress real soon.
2. May not be suitable for everyone. If you have a low credit score or struggling to make minimum payments you may need to seek help from a credit counselor or a financial adivisor.

High interest rates may be intimidating. This can make it difficult to get started with the debt avalanche method but you need to remember it will save you money on interest charges over time. It is all for the best.

Comparing the Debt Snowball Method to the Debt Avalanche Method

Debt snowball method vs debt avalanche method

Finally, the choice between the debt snowball method and the debt avalanche method depends on your financial goals, needs and circumstances. Weigh the pros and cons of each method and choose which one suits your situation best.

Personally, I would advice that you prioritize the debts with the highest interest rates first. This way you can save money on interest charges even though your progress
may not be as visible.