Nothing comes easy in life. You have to work hard for it. When it comes to paying off debt, you can follow two distinct methods. The first one is the debt avalanche method and the second is the debt snowball method. Both methods help you remove debt from your life. It's not easy, but with some determination and skill you can become debt-free.
What is a debt avalanche method?
In this method, you have to make minimum payments on all your debts. Use the rest of the amount to make extra payments on the debt that has the highest interest.
How long do you need to do it?
The simple answer is that you have to make extra payments on the highest-interest debt every month until it's paid off.
What happens after the highest-interest debt is paid off?
You have to roll over the amount over the next highest-interest debt until its balance becomes zero.
As you pay off debts one by one, you have more money in hand to focus on other debts.
The debt avalanche method helps you to save a lot of money on interest.
The debt avalanche method helps you get out of debt quickly as you save money on interest.
When should you use the debt avalanche method?
When you are determined to reduce the overall cost of borrowing.
When you are self-motivated by numbers and facts.
When you do not need psychological motivation.
When you have faith in this debt relief strategy.
When you are disciplined enough to make extra payments on debts for an extended period.
What is a debt snowball method?
It is also a debt relief method wherein you focus on the smallest debt first and then on the other debts. You make extra payments on the smallest debt while making minimum payments on the other ones. So, you take on the smallest challenge first. From the psychological perspective, it is easy to face small challenges before handling the bigger ones. And when you pay off the smallest debt successfully, you get an extra dose of enthusiasm and are charged up to pay down the next one!
The proponent of the debt snowball method, Dave Ramsey believes that it is the best debt payoff method as it motivates people to stick to their repayment plan. People observe instant progress in the debt snowball method, and that encourages them to stay pumped up to complete the repayment process.
Just like the debt avalanche method, you make extra payments on a particular debt. The only difference is that you focus on the debt with the smallest balance instead of the largest. After you have successfully paid off the smallest debt, you can snowball the entire amount and throw it toward the next debt. Repeat the process until you have paid off all your debts and attained financial stability.
The debt snowball method is based on the principle that small wins lead to big victories. It motivates people to stick with the repayment plan. People are less likely to think about leaving the debt elimination journey midway.
Small victories can make you happy and help you stay motivated. However, there is one thing you must keep in mind. You may end up losing more money in the long run on the interest.
What is the similarity between the two methods?
In both methods, you have to make a list of debts.
In both methods, you have to make minimum payments on all your debts.
In both methods, you have to be cautious about spending money.
In both methods, you have to make extra payments.
The concept of rollover is there in both methods.
You have to hold on to your patience in both situations.
Both methods help you get out of debt without seeking professional help.
What are the differences between the two methods?
The primary difference between the debt avalanche and snowball method is in the approach.
Suppose you have three types of debt with different interest rates and outstanding balances.
Credit card debt - Outstanding balance - $12,000, interest rate - 19.25%
Auto loan - Outstanding balance - $10,000, interest rate - 2.5%.
Student loan - Outstanding balance - $20,000, interest rate - 3%.
In a debt avalanche method, you will pay off the credit card debt first.
In a debt snowball method, you will pay off the student loan first.
In the avalanche method, your focus debt is a credit card since it carries the highest interest rate.
In the snowball method, your focus debt is the student loan since it has the highest outstanding balance.
What you should do when you want to follow the debt avalanche or snowball method
If you are dead serious about following the debt avalanche or a snowball method, then here a few steps you can take:
- Make a list of your debts from the highest interest to lowest interest in the case of the debt avalanche method.
- Make a list of debts from the lowest outstanding balance to the highest balance in the case of the debt snowball method.
- Make minimum payments on your debts in case of both methods.
- Create a budget to save money and make payments on your debts. Keep in mind that you have to make both minimum and extra payments on your debts. A budget can help to generate enough cash for making the required payments.
- Reduce your unnecessary expenses and lead a frugal life until you get out of debt.
- Do not skip payments for one or two months since that will break the momentum.
What is the best way to get out of credit card debt?
When you owe a huge amount, the best way to get out of credit card debt is to follow the avalanche method. It helps to reduce the time it takes to pay down your debt.
However, if you need more psychological motivation to become debt-free, you should stick to the debt snowball method.
Both methods have pros and cons. Ultimately, it depends on your personality trait. If you need psychological motivation to pay off debt, then the snowball method is the best option. If you have surplus funds in your bank account, you can opt for the avalanche method.
If you are still confused regarding the best way to get out of credit card debt, you can use a debt payoff calculator. It can help you to understand how much you can save with each method. And that can help you choose the best debt relief method for yourself.
What are the other alternative options to pay off debt?
If you are not comfortable with both debt snowball and avalanche methods, you can try out other debt relief methods. You can seek professional help if required. For example, you can enroll in a debt consolidation program to pay back your creditors. You can also settle your credit card debts through a credit card debt settlement company.
In professional debt relief programs, you have to pay a fee for enjoying the services. Moreover, you have to read the customer reviews of the debt relief companies to get an idea about their legitimacy. So, it is not an easy job. You need to take precautionary steps to avoid scams and protect your money.