When it comes to paying off debt for the first time, the most important thing is to have a plan. Without a plan, paying off debt can seem like a daunting task that quickly fizzles out any motivation you have to pay off debts.
Having a plan can help you realize that debt is not forever and that it is possible to be debt free. Debt often feels like a life sentence, but it doesn’t have to be.
As you explore the different types of debt settlement plans, the debt snowball versus debt avalanche debate inevitably comes into play. Each side of the debate makes strong points for their preferred debt settlement strategy. But what is the best method to pay off debt? Let’s take a closer look at how these two strategies compare.
The debt snowball method
The debt snowball method is a plan to attack your debt with the smallest balance first. So if you have credit cards, student loans, and a car loan, the first step is to list all of your remaining balances. Determine which outstanding loan balance is the smallest and focus on that first.
When you focus on the smallest balance, every month toss the extra money you have to pay off debt on this loan. As for the rest of your outstanding loans, you can stick to the minimum while aggressively attacking the smallest balance.
As soon as the smallest loan has been paid off, switch to the next smaller one. When you move on to the next down loan, you can use all of the money you have available to pay off the debt plus the minimum payment on the loan you just removed. With this, your snowball that you used to fight your debt will continue to grow.
Advantages of the snowball method
When you have a lot of debt on your books it can be difficult to know what to tackle first. The snowball method allows you to focus on one small debt at a time. Instead of feeling overwhelmed by the sheer number of debts that need to be paid off, you can focus on one achievable task at a time.
As you reduce your smaller debts, you can enjoy the feeling of being able to completely remove one debt from your life. The solemn feeling can be the motivation you need to move on one small debt at a time. Half the battle to pay off debt is the motivation to do so. The snowball method is great if you’re looking for an extra boost of motivation.
Disadvantages of the snowball method
The main disadvantage of the snowball method is that you will likely pay more interest on your debt settlement journey. Focusing on the smallest debts first may not mean you are using your funds in the most efficient way.
While you’ll likely be paying more interest, the motivation boost from the snowball method might be worth it when you need the small wins along the way.
The debt avalanche method
The other option is the avalanche method, which focuses on the highest interest rate first. If you are using the avalanche method, look at all of your outstanding balances to see which is the highest interest rate.
You start by paying off the loan with the highest interest rate. From there, you assign all the funds that are available to you for the repayment of debt to the next higher interest rate.
Depending on the amount of outstanding credit you have on the books, you may need to start with a large outstanding credit balance. With that said, it can take time to make a big profit from eliminating an entire debt. But mathematically, you are well on your way to getting rid of your debt in the most efficient way possible.
Advantages of the avalanche method
The numbers behind the avalanche method ensure that you don’t pay more than you absolutely have to when you reduce debt. If you stick to your plan, you will pay less interest and less overall with the avalanche of debt. In other words, you are well on your way to becoming debt free.
Disadvantages of the avalanche method
While the math behind the avalanche method is enticing, it can be difficult to keep the course going. Without small wins along the way, you may not have the motivation you need to stick with your new repayment plan.
Debt Snowball vs. Debt Avalanche: Which One Is Best?
In the personal finance realm, almost everyone has an opinion on what method is best for paying off debt. But the real question is which method is best they.
The rapid successes of the snowball method often make it a more sustainable choice for people. However, if you’re a numbers mindset, the avalanche method advancements may be a better fit. With the right internal motivation, you may not need the small gains the snowball method gives you to stay on track.
Ultimately, what works best for you is what helps you sleep best at night. This may sound strange, but debt can have an impact on your money attitude, motivation, and self-esteem.
It’s okay to change things up a little. You can create a hybrid method to withdraw some small balances and then focus on larger payments. You can save a ton of money and then make a flat payment.
When it comes to choosing between a debt snowball or a debt avalanche, do what makes sense to you. Whichever method you choose, the most important thing is to get started.
It can be easy to fall into analytical paralysis thinking that you need to «properly» pay off your debt. Do it your way. Most importantly, just do it.
Momentum leads to motivation, which often leads to even more momentum. And this is a powerful cycle that can produce amazing results. With the right debt settlement plan for you, you will soon be debt free someday!