If you are in debt, there are many ways you can handle it. Common methods are known as the debt avalanche and the debt snowball methods.
While these may seem like unpleasant environmental conditions, they both can be beneficial in improving your financial situation. But which is right for you?
Debt Avalanche vs. Debt Snowball: What’s the Difference?
Both the debt avalanche and debt snowball method require you to make minimum payments on all but one debt. However, with the debt avalanche method, you pay more money towards the debt with the highest interest rate. With the snowball method, you pay off the smallest debts first and work your way up regardless of interest rate.
Now let’s take a look at both methods in closer detail so you can decide which one is best for you.
The debt avalanche method involves making minimum payments on your debt and then taking the money you have left over to pay for high interest debts.
So, for instance, let’s say you own the following debts:
- $10,000 car payment at 12% interest
- $4000 appliance payment at 5% interest
- $12,000 credit card debt at 7% interest
If you go with the avalanche method, you will pay off the car payment first. Once that is paid off, you will pay $1040 in interest on your other debts assuming you pay them off within the year.
If you use the snowball method, you will pay the appliance payment off first. This will leave you with $2040 in interest on your other payments, almost twice as much!
The avalanche payment may also get you to pay your debts off sooner. If you can devote the money you save to paying off debts, you will get out of debt quickly.
Debt Snowball Method
Now that we know that the debt avalanche method is the way to go when it comes to saving money, the question is, why would anyone use the debt snowball method?
Well, the answer is pretty simple.
The debt snowball method is good for people who simply don’t have the money to pay off larger debts. And being able to make small dents in their debt can motivate them to continue making payments to improve their financial situations. In fact, studies have shown that people with large balances are more likely to stick with their debt payoff plans if they focus on smaller balances first; no matter what common sense may tell them.
In time, those following the snowball method may even be able to switch to the avalanche method if their financial situation improves.
How to Make the Debt Avalanche Method Work for You
The debt avalanche method can save you money in the long run, but it can be difficult to find the discipline and extra funds to make it work for you. If you are interested in trying this method, here are some tips that will ensure your success.
Create a Budget
Creating a budget for a cash avalanche payment plan is the first step to take. Once you understand what you owe and where you spend your money, you can start tackling the avalanche.
List all the minimums you pay on your debt from highest interest rates to lowest. Figure out the total you are spending a month. Then figure out how much extra money you can devote to your highest interest bills.
Make these payments a priority.
Once you start knocking off debts, roll the minimum into your high interest payments. So, for instance, let’s say you are making a $100 a month minimum payment on a low interest credit card. After say, six months, that credit card gets paid off. Now you can use that extra hundred dollars to pay off your high interest payment.
Use a Debt Avalanche Calculator
A debt avalanche calculator is a tool that can be found online. You can use it to create a budget to see how much extra money you can put towards your debt each month to pay your balances off quickly.
To use it, enter the details of your debt. The calculator will come back with information on how soon you will be able to pay off your balances and how much money you can save as compared to the snowball method.
Using the calculator will help you get a good idea of how much you are able to devote towards payments. Finding out how much money you can save will inspire you to keep up with this plan.
If you choose the debt avalanche method, here are some other ways to ensure success.
- Devote Extra Money to Payments: If you get an unexpected payment like a rebate check or a bonus at work, use it towards your high interest payments.
- Cut Corners Where You Can: Think of the things you are spending money on. Are you buying lunch out every day when you could be taking it from home? Can you hold off on that big vacation you were planning until you are out of debt? Cutting down on expenses can pay off big time when it comes to getting out of debt.
- Start a Separate Checking Account: It’s a good idea to open a separate checking account devoted to paying off high interest debt. You can get direct deposits from your paycheck to ensure a certain amount of money goes into this account. You can also set up automatic payments so that a set amount goes towards paying off your debt every month.
In my opinion, if you are trying to pay off a debt, the debt avalanche method is the way to go. It may not be feasible for everyone, but it is the best option for paying off debt quickly while avoiding interest. What do you need to do to make the debt avalanche method work for you?