Debt Snowball vs. Debt Avalanche: Which Method Is For You?
Having a strategy when managing and paying off your debts hugely helps. If you’re having trouble coming up with your own, you can look it up online. And if you do, you’ll notice two popular strategies: the debt snowball and the debt avalanche methods.
Each method has its own unique approach to tackling debt, so you have to understand the differences between them so you know which one to apply and how you can modify either or both of them according to your financial situation.
Debt Snowball Method
The debt snowball method prioritizes paying off debts while making minimum payments on larger ones. Popularized by Dave Ramsey, a well-known financial expert with a podcast listened to by hundreds of thousands of people, it’s focused on building momentum by seeing small debts get paid off.
The Steps
1. Start by listing your debts from smallest to largest, regardless of their interest rates.
2. Make minimum payments on all your debts except for the smallest debt.
3. After clearing the debt, allot the amount you were paying towards it for the next smallest debt.
4. Repeat until all your debts are paid.
Benefits of the Debt Snowball Method
One of the advantages of the debt snowball method is the psychological boost it provides. Paying off your smaller debts will give you a sense of accomplishment and, in turn, motivation and confidence to settle your other debts.
The debt snowball method also simplifies your repayment plan. Focusing on specific debts helps in managing your payments and staying organized, making it perfect for those who want a straightforward strategy to keep them on track.
Debt Avalanche Method
The debt avalanche method is a more driven approach compared to the debt snowball method. Instead of going after big debts, you take out high-interest debts first.
The Steps
1. List all your debts based on their interest rates from highest to lowest, regardless of the total amount.
2. Pay the minimum amount due on all debts except the one with the highest interest rate.
3. Pay off the debt with the highest interest rate.
4. After the high-interest debt, pay off the debt with the second-highest interest. Repeat until you pay off all debts.
Benefits of the Debt Avalanche Method
The debt avalanche method helps save money in the long run by paying off high-interest debts first, making it helpful to borrowers who want to minimize interest costs and become debt-free ASAP. It also provides a sense of security by eliminating high-interest debts that will cost you more in the long term.
Another advantage is that it enables you to address your debts upfront.
Choosing the Method for You
Deciding between the debt snowball and debt avalanche methods depends on your financial goals, preferences, and how you can be motivated. If quick wins help keep you motivated, go with the debt snowball method. It can be quite encouraging to see smaller debts being paid off, as it gives us the boost we need to stay focused on our goals.
If your main objective is to save money on interest, then the debt avalanche method might be a good fit for you. This approach prioritizes paying off high-interest debts and can save you more money in the long run.
Conclusion
Both debt snowball and debt avalanche methods have their advantages. The key is choosing a strategy that aligns with your goals and keeps you motivated throughout your journey of repaying debts. So if you’re repaying your debts from the best money lender Singapore or somewhere else, remember: every progress made towards paying off your debts is a step in a positive direction towards achieving financial freedom.
