There is a common misconception that debt needs to be eliminated with credit counseling or a debt consolidation program. Nothing could be further from the truth. While credit counseling or a debt consolidation program might eventually be the routes you choose to help eliminate your debt, there are some other debt reduction methods you should try first. They are free, easy and proven to work.
Two of the more commonly talked about debt reduction methods are the debt snowball and the debt avalanche. With the debt snowball method, people focus on paying debts off one at a time, in the order of smallest to largest balances. With the avalanche method, you pay off debts one at a time in the order of the highest interest rate first. So which method is better for you?
The Debt Snowball vs. The Debt Avalanche
The debt snowball was made popular by Dave Ramsey. It goes against the obvious mathematical benefit of paying high interest debts first, and instead says you should focus on paying debts with the smallest balances first to generate momentum. The idea of paying the lowest balance debt first is that you will pay it off quickly and you can use the money you just saved toward the next debt on your list. You benefit from the quick wins and the results help motivate you to remain disciplined to pay off your remaining debts.
To get started, make a list of all of your debts, in order of smallest balance owed first. Pay the minimum amount to all of your accounts except for the first account on the list, for which you should contribute as much as you can possibly afford each month until it’s paid off in full.
Once you pay off an account, take the money you had been sending to that account and apply it to the minimum payment of the next debt on your list. The amount of money you put toward your debts grows like a snowball rolling down a hill, helping you pay your debts off more quickly.
The debt avalanche works very similarly to the snowball method, except that it involves paying your debts in order of the highest interest rate first. Mathematically speaking, you will save money over the long haul when you pay higher interest debts first. When all of your debts are about the same interest rate, however, it doesn’t make much of a difference.
What the avalanche method is missing is the quick win offered through the snowball method. If your highest interest debt also happens to be one of your largest balances owed, it can take awhile before you pay off the first account on the list. Getting out of debt requires discipline, and for many people, it can become discouraging — it’s easy to fall off the wagon if you don’t see immediate progress.
Choose the Right Debt Repayment Method for You
Which method of debt repayment is better for you, the snowball or the avalanche? Take a look at your debts to decide; are most of them about the same interest rate? If you don’t have some with low interest rates and some with high interest rates, you are probably better off focusing on the snowball method of debt repayment since you won’t have as much interest to save through the debt avalanche method. If you have a wide variety of interest rates ranging from low to high, you might want to use the avalanche method to save on interest paid.
On the other hand, if you are someone who needs the momentum of the quick win to see the results of your efforts, go with the snowball method regardless of your interest rates. It should help motivate you to stick with it until you are debt free.
The goal here is to recognize which method will work best for your needs and make the commitment to getting out of debt once and for all.