Need help getting out of debt?There are various debt-reduction tactics available, but the most well-known is the debt snowball and debt avalanche methods.

 In this article, we will explain the differences between the two methods so that you can decide which one to apply.

The Debt Snowball Strategy

The objective of the debt snowball is to pay off as many loans as possible as quickly as possible. This is even if it means paying more interest in the long run.

Pay the minimum repayment on all of your debts as a starting step. Then you allocate the rest of the money left over to the smallest debt. When the smallest debt is paid off, apply the minimum payment plus any remaining funds to the next smallest debt.

The main concept of this debt-reduction technique is that you will see benefits soon. You can usually pay off your lowest debt in a matter of months. Furthermore, by the time you have reached your large obligations, you will be able to pay off significant amounts. This makes the debts seem less overwhelming, and the immediate results, in the beginning, keep you motivated to keep going.

While paying off your debts, this strategy costs you money.  That is a weakness of this strategy.

The Debt Avalanche Strategy

The debt avalanche approach seeks to reduce the amount of interest you pay on your debts, which means you will save the most money, in the long run, using this method.

The debt avalanche strategy is similar to the debt snowball strategy. You pay the bare minimum on all of your debts. When you have paid off an obligation, the minimum payment plus the remaining funds are applied to the following debt. And, like with the snowball technique, you pay off large monthly payments until you reach your final debt.

The difference is that you sort the debts according to the highest interest rate rather than the amount of the loan. You begin by paying off the loan with the greatest interest rate, and once that debt is paid off, you go on to the one with the next highest interest rate.

 

Do you act more based on reason or emotion?

Though one debt repayment strategy is based on math and the other on mindset, both are equally effective if used effectively. 

You can reasonably assume that the math with the debt avalanche method is better than the math with the debt snowball strategy. However, instead of focusing too much on which strategy is the best, consider which one is best for you.  The two methods can appear to be extremely similar, and they are. The truth is that you can’t go wrong with either of them because they both get you guilt-free at record speed.

 

The avalanche method wins mathematically

If people were machines with no motivation, discipline, or emotions, the avalanche technique would produce the quickest results.

After all, borrowing is expensive. Debt becomes more costly when interest rates rise. If you pay off your loans with the highest interest rates first, you will pay less interest overall and so pay off all of your debts sooner.

The avalanche strategy is most suited for someone who makes judgments primarily using their thinking. The avalanche method will always save you the most money on interest payments.  Sticking to your goal requires less motivation. 

 

In practice, the snowball method is more effective

Our motivation fluctuates between high and low.  Discipline? Some people have a lot of it, while others don’t. And if you’re grumpy, sad, or lonely, you’ll make an impulse purchase in no time.

The snowball method provides a variety of advantages that may be more significant than the interest savings. People who mostly act on emotion frequently require a little more short-term external motivation to maintain focus. In this instance, the debt snowball technique would be ideal. Short-term wins will help you stay on track for debt-free living.

Psychologically, the snowball method is rewarding. People who adopt the debt snowball method are more likely to pay off their debts since it feels good and pushes them to keep going.

The snowball strategy increases cash flow more quickly. Eliminating a debt also implies eliminating the loan’s minimum payment requirement, lowering your total minimum payment.

 

Have questions? contact us today.

 

Resource: Forbes.com,  CNBC.com