One of the core principles of building and maintaining wealth is to prioritize paying off any outstanding debt. There are several popular strategies for paying off debt, including two known as the Debt Avalanche and Debt Snowball methods. They offer different ways of prioritizing your debts, and each comes with its pros and cons. Here is a helpful breakdown.
Debt Avalanche vs Debt Snowball: What Is The Difference?
The Debt Avalanche method focuses on saving money by targeting debts with the highest interest rates first. You continue making minimum payments on all debts but put any extra money toward the debt with the highest interest, regardless of the balance, until it’s paid off. Then, you move to the next highest interest debt. This approach minimizes the total interest you pay over time, but progress can feel slow if the largest debt takes a while to clear.
- Pros:
- Saves money by reducing total interest paid.
- Gets you out of debt faster if followed consistently.
- Cons:
- Progress can feel slow, especially if high-interest debts have large balances, which might be less motivating.
The Debt Snowball method, on the other hand, focuses on motivation by tackling the smallest debts first, regardless of interest rates. You make minimum payments on all debts and put extra money toward the smallest debt. Once that’s paid off, you move to the next smallest. This method provides quick wins, helping you stay motivated, but it can cost more in interest over time.
- Pros:
- Builds motivation with quick wins by paying off small debts first.
- Easier to stick with for many people.
- Cons:
- Costs more in interest over time since larger, high-interest debts are paid off later.
Choosing between the two depends on your circumstances and personality, and whether you value saving money or staying motivated to pay off debt. Both methods can be effective if followed consistently.
Is It Better To Snowball Or Avalanche Debt?
Ultimately, the Debt Avalanche method is better than the Debt Snowball method if you want to save the most money and pay off debt faster. By prioritizing debts with the highest interest rates first, you will reduce the total interest you’ll pay over time. This makes it the more efficient option, especially if you have significant high-interest debts like credit cards (which currently have a brutally high interest rate average of 24.6%).
While the Debt Snowball provides motivational boosts by paying off small debts first, it leaves high-interest debts to grow larger, costing you more in the long run. The Debt Avalanche focuses on the math, not the emotions, making it the smarter financial choice for those disciplined enough to stick with it.
What Is An Example Of A Debt Avalanche?
Here’s how the Debt Avalanche method works in practice:
- List Your Debts: Write down all your debts, including their balances, interest rates, and minimum monthly payments. Organize the list by interest rate, starting with the highest.
- Continue Minimum Payments: Make the minimum required payment on all of your debts to avoid penalties and keep them current.
- Target the Highest Interest Debt: Put any extra money you can afford toward the debt with the highest interest rate while continuing to pay the minimums on the others. This reduces the costliest debt first.
- Move to the Next Debt: Once the highest interest debt is paid off, take the money you were using to pay it and apply it to the debt with the next highest interest rate. Repeat this process until all debts are cleared.
By focusing on high-interest debts, the Debt Avalanche reduces the total interest you pay and allows you to pay off debt faster than other methods, provided you stick to the plan.
Build Debt Repayment Into Your Monthly Budget
One popular method of paying off debt is to include it as a fixed part of your monthly budget. The 50/30/20 rule, for example, involves allocating 50% of your after-tax take home for essentials, 30% for things you want, and 20% for saving and debt repayment. This can work in conjunction with the Debt Avalanche method.
Have questions about the best methods for paying off debt? Contact Zynergy Retirement Planning today.