Debt Avalanche vs. Debt Snowball – Two Methods to Prioritize Debts
August 27th, 2018 by Bunch & Brock
If you are making minimum monthly payments on a mountain of debt, it may seem impossible to imagine a debt-free future. A debt reduction plan such as “debt avalanche” or “debt snowball” can help you pay down and eventually get rid of your financial obligations. These methods involve paying off creditors one at a time, a strategy that has been proven effective. According to Forbes, people who focus on paying down a single debt are more likely to remain motivated for long-term debt elimination.
Debt Avalanche or Debt Snowball — Which Plan is Right for You?
Before you implement any debt repayment plan, you first need to evaluate your finances to determine how much money you can earmark for debt removal. It will help to create a written budget, and this will likely mean eliminating some frills until you can achieve freedom from your debt.
The Debt Avalanche Plan
Debt Avalanche is focused on reducing interest payments as much as possible. This plan is best for people who are interest-conscious and motivated by avoiding unnecessary penalties on their debt. Following this method means you’ll pay less interest over the long run, and thus save money.
To use the Debt Avalanche plan, follow these steps:
- Make a list of all of your debts, including amounts owed and the interest rate you are paying on each balance. Put the debt with the highest interest rate at the top and follow in sequence, listing the debt with the lowest rate last.
- Select the creditor at the top of the list and commit to paying as much as possible toward this balance each month. (Remember, you must continue to make minimum payments on all other debt as well.)
- Once you have paid off debt #1, attack the next one on the list. You should be able to pay a little more toward the next debt, since the first obligation is eliminated.
- Continue until all outstanding debts are paid.
Paying off a high-interest loan can be very satisfying, even if it takes a while. If you think reducing interest rates would best motivate you to continue with long-term debt elimination, the Avalanche method may be for you.
The Debt Snowball
This plan approaches debt repayment with a different strategy. The goal is to pay off the smallest obligations first, disregarding the amount of interest charged for each debt. With this plan, you eliminate more creditors at a faster pace, which can contribute to a feeling of accomplishment.
To use the Snowball plan, the steps are:
- List all of your debts, starting with the debt with the smallest balance at top and ending with your largest creditor. You can leave interest rates off of this list.
- Begin paying as much as possible monthly toward the debt at the top of the list. Again, you will continue to keep up minimum payments on all of your credit obligations.
- When you have paid off the smallest debt, move on to the next in line, adding in the minimum payment you no longer need for the eliminated debt.
- Continue until you have paid off all debt.
With the Snowball, you can pay off small debts quickly, and then make more substantial payments to the large balances that remain. For many people, this quick-reward method provides the reinforcement they need to stick with a debt-reduction plan.
Deal with Debt Before You’re Snowed In
A workable debt-busting plan can prevent bigger problems down the road. At Bunch & Brock, we offer professional assistance to clients who need help dealing with their debt, including counseling and, if necessary, representation for legal bankruptcy protection.