The Snowball and Avalanche Strategies of Paying off Debt

When you have a number of different debts, attempting to pay them all off can seem overwhelming. It’s common to feel like you’re tossing money down a bottomless well. However, if you stay organized and focused, you can work your way to freedom from debt. Two ways of methodically reducing debt are the snowball and avalanche methods.

But before you decide which one will work for you, take a look at your current budget to make sure you aren’t living beyond your means and creating more debt. When you’ve calculated how much of your income is needed to cover basic living expenses and minimum debt payments, the amount of income left over every month will be your “debt budget.” To increase this debt budget, cut unnecessary expenses and luxuries. You don’t have to give up luxuries forever, just until your debt is paid off. The goal is to maximize your debt budget by minimizing the number of bills you have to pay.

The Snowball Strategy

The snowball strategy focuses on psychology and motivation to help you pay off your debts. You pay your monthly minimums, then, you use all of your debt budget to pay off your smallest debt. Once it’s paid off, roll the amount of money you were using to pay its minimum balance into your debt budget and apply it toward the next smallest debt. The amount of your debt budget will grow with each debt paid off, kind of like a snowball that starts small and slowly grows into a snow-boulder.

Since you start with the smallest debt, it won’t take long to experience your first victory of eliminating an account balance. This success will give you motivation to tackle the next debt.

The Avalanche Strategy

While the snowball strategy can be successful in keeping you motivated, it doesn’t save you the most in the long-run. In many cases, accounts with high interest rates will grow and compound while you’re focused on paying the smaller debts. If this is true for you, the snowball method could cost you thousands of dollars more in interest than if you focus on a more mathematically optimal payment strategy.

In the avalanche strategy, you arrange your debts from the highest interest rate to the lowest, regardless of balance, and concentrate all your debt budget towards paying down the highest interest debt first. By doing so, you’ll be free of debt faster than if you had started with the smallest account first, similar to the way that snow accumulates much faster in an avalanche than when rolling a snowball. Be prepared, if your debt with the highest rate also has the largest balance, you’re in for a longer wait to experience a first “success.”

Which Strategy Is Best for You?

If you’re worried you’ll lose heart if you don’t experience some early emotional rewards, the snowball method is the way to go. However, if your largest debts are on high-rate credit cards, you should prepare for a disciplined avalanche approach. For some people, the two methods will be essentially the same: the highest rate debt will also be the smallest. In this case, you’re lucky enough to get the best of both approaches.

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