Which Method is Best for Paying Down Debt?

The avalanche and snowball methods are two proven systems to help pay down debt effectively and efficiently. Each method has its pros and cons. Since personal finance is personal, let’s discuss each method to determine which suits your situation. 

The Avalanche method focuses on paying debts with the highest interest rates first. 

The Snowball method focuses on paying off debts from smallest to largest.

In each method, once the first debt is paid off, you will use the money being paid towards the first debt and put it towards the next debt owed. You continue this process until all debt has been paid off.

The Avalanche Method

The avalanche method sorts debts from the highest interest rate to the lowest, despite the balance. This option may take a while to pay off the first debt if it has a large balance, but this option is the most cost effective. Over time, this method saves more money on interest payments. As you pay off the debts, the interest rate per debt is lower. The avalanche method may require more patience since it can take longer to pay off the first debt before you feel that sense of accomplishment.

The Snowball Method

The snowball method starts with paying off the smallest debt first. This sorts debts by balance, from smallest to largest. This method allows you to get your first success faster when paying off your debt. It helps to build confidence and boost morale as you continue eliminating your debt. This option can be more expensive over time because it focuses on the debt balance rather than the interest rate. The snowball method allows you to see accounts paid off quicker than with the avalanche method unless your account with the highest interest rate is also your account with the smallest balance. If your debt with the highest interest rate has a large balance, it can be discouraging because it will take longer for your first debt to be eliminated. The snowball method allows you to reach your first achievement faster. 

Each approach has its benefits and drawbacks; how you choose to apply it to your finances is up to you. A combination of these methods can allow you to get your first win and save money in the long run. What I love about the snowball method is that you can become more motivated to reach your goal when you see that first debt (or first couple of debts) eliminated. This helps to motivate, build your confidence, and provide a sense of accomplishment. There is nothing more motivating than seeing a $0.00 balance due on your statements. After paying the first one or two debts with low balances, I would suggest switching to the avalanche method to focus on paying off the high interest debts, even if the balance is larger. Although it may take longer to pay off these debts, you have already proven to yourself that you can focus on eliminating your debt. It should only push you further to reach your goal of being debt free.

Each of these methods is proven to work. You must determine what works best for your situation. You may have a debt that requires immediate attention that is not the smallest debt or the debt with the highest interest rate. In that case, it would be best to forgo the avalanche or snowball method to focus on paying off that debt. Once that debt has been repaid, continue implementing either of these methods. 

I want to encourage independent thinking in how you can manage your finances on your own with the advice that is provided here. Only you know your unique situation unless you work with a financial planner, of course 🙂 then they can lend you their expertise.

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