The main difference between the debt snowball versus avalanche is the time it takes to eliminate debt and which debts you focus on first. The debt avalanche focuses on making minimum payments on all debts while using extra funds to pay off the debt with the highest interest rate first.
The debt snowball focuses on making minimum payments on debts while paying off the smallest debt first, then paying off the larger debts after each small “snowball” debt is paid off, like rolling a snowball down a hill.
This method is usually recommended for people who like quick wins. If you have difficulty sticking to a strict debt repayment schedule each month, this method can incentivize paying off debts by stacking up quicker payoffs. If you have many kinds of debt, such as store credit cards, small loans, auto loans, etc., the snowball will help you gain momentum towards paying off each debt back-to-back.
The snowball method is also recommended if you like a straightforward, no-nonsense approach to debt payoff. You only need to list your debt balances from smallest to largest and focus on them in that order.
However, this method doesn’t work for everyone: if you have a lot of high-interest debt, you will not be using your money most efficiently with the snowball method, as it’ll save time and money to apply the avalanche method. If you have several kinds of the same debt, the avalanche method will be a better fit.
If you prefer to front-load your debt payoff plan and secure quicker wins on several debts, this method is great for you.
Benefits of the debt snowball method:
- Quick wins keep you motivated to keep going
- Makes your largest debt less intimidating
- Avoids taking out another loan
- Can do this method with poor credit
- Focus on one debt at a time (then watch that debt disappear!)
Cons of the snowball:
- It may take longer to pay off your debt
- You could pay more interest over time if you have several high-interest debts
Step one is to list your debts from smallest to largest (excluding mortgage debts). You will also want to ensure you have enough money to pay the minimum monthly payment on each of your debts.
Each month, you will put your extra money towards your smallest debt until it’s repaid (while paying the minimum balance on your other debts).
After your smallest debt is paid off, you will move on to the next, putting extra money towards that debt until it’s paid off, and repeat that process until you reach the end of your list!
Listing your debts from smallest to largest, you’ll make the minimum payments on all debts besides the first one.
For example, you have the following debts:
- $300 medical bill with a $50 payment
- $2,500 credit card debt with a $60 payment
- $7,000 car loan with a $135 payment
You’ll begin by making minimum payments on everything except the medical bill. During the next few months, you’ll allocate any extra money (plus the minimum payment) towards paying the medical bill. Once that debt is gone, you’ll take that freed up $350 and put it towards your credit card debt (plus the $60 minimum payment) until that debt is gone. Repeat once more for your car loan and you are debt free!
The debt snowball plan allows you to build confidence and momentum as you check debts off your list. By the time you get to the larger balances, you will feel like a pro!
- Build your emergency fund: On your journey to becoming debt free, you’ll likely run into unexpected expenses. Having a backup savings account will ensure you aren’t foregoing your debt payments during this period.
- Track your spending: Have a plan and stick to it! Review your budget weekly and keep a close eye on credit score changes.
- Stay current on payments: You do not want to start a debt snowball if you are behind on monthly payments, as this will only complicate your plan. Reach out to your lenders to discuss options to prevent further late payments.
Compared to other strategies for solving debt, the snowball plan does take longer than most. Since you are starting with the smallest debts, you are also accruing more interest as you pay them off.
With that in mind, you should consider the number of your debts and interest rates before choosing a plan.
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