Are you looking for an effective strategy to tackle your debt and pay it off fast? We will be covering two popular methods today: the debt snowball and debt avalanche methods. Keep reading to learn more about them and see if they make sense for your financial situation.
Understanding the Debt Snowball Method
The snowball approach to paying off debt starts by targeting your smallest balance first. Once you pay off the first debt, you roll that monthly payment into the next smallest debt. As you pay off more debts, you’ll have more money to put towards your current focus to speed things along. Since you are working with smaller debts, any extra money you can gather will pack a punch for knocking down your balance. This is an excellent strategy if you want to see quick results to keep you motivated.
Pros and Cons
As with all debt payoff strategies, the debt snowball method has both pros and cons.
Pros:
- Organizing debts by the smallest to largest balance is an easy method to set up and follow.
- By targeting the smaller balances first, you’ll have some quick wins to keep you motivated.
- It’s a great way to start paying down debt even if you don’t have a lot of extra money.
Cons:
- This method doesn’t take interest rates into account, so you could continue to accrue high interest on some debts, adding to your overall balance.
- It may take you longer to pay off all your debt if you have high interest rates on some larger debts.
- The debt snowball method may not be right for you if you need to prioritize another need, such as releasing a cosigner from a student loan.
When you explore the different debt payoff strategies, ensure you have all your financial details at hand. You will need to know your debts and income to create a budget and make an accurate plan.
Is the Debt Snowball Method Right for Me?
Find out if the debt snowball method is right for you by making a list of your current debts, starting with the lowest balance first. Each month, you’ll pay as much as possible on the smallest debt while continuing to make minimum payments on the others. Try this online calculator that lets you enter details for up to 10 debts, plus any extra you can afford each month, to get an estimate of how long it will take you to pay off your debts using the snowball method. Or, choose the snowball method from this calculator, which lets you try out several methods.
Understanding the Debt Avalanche Method
The debt avalanche method works similarly but can end up saving you money in some cases. You focus on paying off whichever debt has the highest interest rate, regardless of the total balance. Then, you move on to the next, including the extra money from the paid debt to increase your payment.
This strategy can help you save money by eliminating high-interest loans first. You will need to have some disposable income each month to pay more than your minimum payment to make this an effective method. It also requires discipline and the ability to focus on the long-term results, as it may take longer to pay off your first targeted debt.
Pros and Cons
The debt avalanche strategy also has advantages and disadvantages that will make it a better fit for some but not others.
Pros:
- You can save money on interest.
- Depending on the number and types of debts you hold, targeting high-interest debts first could help you pay off your balance more quickly.
- Provides a great structure for paying debts if you are budget-oriented.
Cons:
- It might be tough to stay motivated if it takes you a while to pay off a debt in full.
- Saving money on your overall debt balance is not a guarantee.
- You may need to have more discretionary income upfront to make this method effective.
Remember that, just as in the snowball method, the particulars of your situation could make it important to choose one method over another.
Is the Debt Avalanche Method Right for Me?
Determining if the debt avalanche method is best for your situation is similar to the process for the snowball method. You need to make a list of all your debts but organize them by the highest interest rate down to the lowest interest rate. Plugging your information into this debt avalanche calculator will give you an idea of the time it will take to reach a zero balance.
The Bottom Line
Choosing the debt payoff strategy that is best for you depends on your priorities. If seeing results as soon as possible motivates you, then the debt snowball approach can help you drop smaller balances quickly and gain momentum and excitement to assist you in staying committed to paying off the larger balances.
Or, if you prefer to knock out high-interest debts first to save yourself money on interest rates, then the debt avalanche method is for you. A good way to decide is to try out the online calculators for both methods and compare the timeline to get debt-free, along with the total cost to pay off your debt. While they can’t give you an exact figure, it’s a good starting point to help you decide which method is better for your situation.
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