debt snowball vs debt avalanche

Debt Snowball vs. Debt Avalanche, Which One Is Better?

When planning your way out from a labyrinth of growing debts towards a debt-free life, choosing a right debt reduction method is an indispensable part of the plan. There are a number of debt reduction strategies. Debt snowball method was popularized by financial expert Dave Ramsey. Another most recommended method is the debt avalanche method. It is important to understand the working, implications and the impact of each of these methods over your pocket. Evaluate the compatibility level of each strategy, and then move ahead with the one that suits you the best.

debt snowball vs debt avalanche

Debt Snowball Method

This method prioritizes debts on the basis of the amount outstanding, starting with smallest debts first and moving on to the larger debts. This method works in the following way.

  1. Arranging debts in the ascending order of the balances outstanding.
  2. Making minimum monthly payments for each of the debts. Contributing extra funds towards the payment of the smallest debt every month till it is finally repaid.
  3. Focusing on the next smallest debt on the list and repeating step 2 till it gets scratched off from the list.
  4. Repeating the cycle till all debts are paid off.

After every debt is paid off, more funds are available i.e. from the minimum monthly payment of the previous debt and any extra money that you might have at hand. This fund can be used to pay off other debts quickly. Thus, the debt repayment amount grows bigger like a rolling snowball every time a debt is paid off.

Debt snowball is suitable if you have wide range of debts. There is a psychological factor attached to this strategy. It starts showing positive results within a shorter period of time, which works like a motivator and gives mental satisfaction. It helps stay focused on the plan till all the debts are eliminated.

Debt Avalanche Method

Debt Avalanche strategy aims at paying off the most damaging debts first, working its way towards the lower interest debts. This helps save on the cost since it reduces the period of time for which you pay higher minimum monthly amount for the higher interest debt.

This strategy works in the following manner.

  1. Arranging debts in the descending order of the interest charged on them.
  2. Making minimum monthly payments for each of the debts. Contributing extra funds towards the payment of the highest interest debt every month till it is completely repaid.
  3. Targeting the next highest interest debt on the list and repeating step 2 till it is eliminated.
  4. Repeating the cycle till all debts are paid off.

When you do the math you will find that debt avalanche is actually faster and cost-effective method of debt reduction. However, positive results take a little longer to show up, needing you to have patience. This method is suitable when you have a limited number of debts.

Which One Is better?

Debt avalanche makes financial sense as you will pay less interest on your debt and get out of debt sooner as well. However some pay prefer to go for debt snowball as it lets you have small wins by eliminating smaller debt, it can create an impression of a simpler debt payback plan.

You can also combine these two techniques. Use debt snowball technique to eliminate majority of the smaller debts. This will help you stay motivated. When only a few debts are pending, use debt avalanche strategy to wipe them off. You will save a few dollars by giving priority to the most expensive debts.

Both the above strategies work well provided they are implemented for a suitable situation and in a disciplined manner. You must refrain yourself from borrowing more funds during the process, otherwise it will beat the purpose of debt reduction.

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