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Abstract

/b>. It is also a four-step process.</p><h2 id="917c">Why the avalanche method works</h2><p id="2b00">If you are the kind of person where motivation isn’t an issue and your main priority is to get out of debt as quickly and efficiently as possible, the avalanche method is for you.</p><p id="8329">When I say the avalanche method is more “efficient” I’m referring to the fact that by focusing on the debt with the highest rate of interest first, you will pay less total interest by the time you have cleared all your debts.</p><p id="1add">If you have the discipline to “stick with it”, knowing it might be a long time before you get your first “win”, this might be the route for you.</p><h2 id="fe23">Snowball vs Avalanche</h2><p id="daef">Let’s say you have the following debts.</p><ul><li>Credit card 1: $10,000 balance and 19% interest rate</li><li>Credit card 2:$ 5,000 balance and 18% interest rate</li><li>Car loan: $30,000 and 9% interest rate</li><li>Personal loan:$ 3,500 balance and 7% interest rate</li></ul><p id="4b2e"><b>Total debt: $48,500</b></p><p id="49fa"><b>Combined minimum monthly payments$ 963</b></p><p id="8186">Let’s also assume you have an additional $500 to pay down your debt. This is the money you will use to accelerate your debt repayment.</p><h2 id="0948">If you use the snowball method</h2><p id="54ad">You would pay your debt in the following order:</p><ul><li>Personal loan</li><li>Credit card 2</li><li>Credit card 1</li><li>Car loan</li></ul><p id="9b22"><b>Using the snowball method, you would be debt-free in 40 months and would pay$ 9,755 in interest during that time.</b></p><h2 id="734c">If you use the avalanche method</h2><p id="6d8f">You would pay your debt in the following order:</p><ul><li>Credit card 1</li><li>Credit card 2</li><li>Car loan</li><li>Personal loan</li></ul><p id="be79"><b>Using the avalanche method, you would be debt-free in 40 months and would pay $8,908 in interest during that time.</b></p> <figure id="d571"> <div> <div> <img class="ratio" src="http://placehold.it/16x9"> <iframe class="" src="https://cdn.embedly.com/widgets/media.html?src=https%3A%2F%2Fanchor.fm%2Fben5933%2Fembed%2Fepisodes%2FHow-I-Paid-Off-50-000-Of-Debt-er7nth&display_name=Anchor+FM+Inc.&url=https%3A%2F%2Fanchor.fm%2Fben5933%2Fepisodes%2FHow-I-Paid-Off-50-000-Of-Debt-er7nth&image=https%3A%2F%2Fd3t3ozftmdmh3i.cloudfront.net%2Fproduction%2Fpodcast_uploaded400%2F3048735%2F3048735-1579369591504-1df0aeab3612e.jpg&key=a19fcc184b9711e1b4764040d3dc5c07&type=text%2Fhtml&schema=anchor" allowfullscreen="" frameborder="0" height="102" width="400"> </div> </div> </figure></iframe></div></div></figure><h2 id="58ff">So, which is better?</h2><ul><li>Both the snowball method and the avalanche method would have you debt-free in 40 months.</li><li>If you used the avalanche method you would save$ 847 in interest payments</li></

Options

ul><p id="a727">If your measuring stick is getting debt-free in the most efficient way possible, the avalanche is the better strategy.</p><h2 id="4711">It doesn’t matter which route you choose</h2><p id="dc2b">One of the points we hammer home in the <a href="https://dogged-mover-9757.ck.page/products/the-financial-mentor-program">Financial Mentor Program</a> is that it does not matter which debt repayment you choose. Saving a few hundred dollars per year is nice but two factors are much more important than minimizing the amount of interest you pay.</p><ol><li>Making sure you manage your spending to ensure you never fall back in debt</li><li>You pick a debt repayment strategy that you can stick to</li></ol><p id="a059">Before you begin paying off debt, it’s important to create a budget that is within your means and stick to it. If you don’t address the problems that caused you to fall into debt in the first place, odds are you will end up back in debt before too long.</p><p id="4f74">Nothing is more defeating than spending four years aggressively paying off debt only to start falling back into debt. Losing debt is like losing weight, it’s all about your daily habits.</p><p id="4be4">It’s also important you pick whichever debt repayment strategy you can stick to. Yes, the avalanche method is the better choice on a spreadsheet. <b>But your life is not a spreadsheet!</b> If you think you’ll have a better chance of sticking with the snowball method, then that is the correct choice for you.</p><p id="d9c0">If I can use another analogy, the choice between the snowball and the avalanche is like planning a road trip.</p><ul><li>Your destination is a debt-free life.</li><li>The snowball method and the avalanche method are two separate roads that lead to the same destination.</li><li>The snowball method is a 1,000-mile road</li><li>The avalanche method is a 900-mile road</li></ul><p id="8673"><b>It doesn’t matter which road you take, what matters is that you have enough gas in the tank to make it to your destination</b>.</p><p id="35a8">If you develop proper spending habits and pick a debt repayment strategy that you can stick to, nothing is stopping you from paying off your debt.</p><p id="5304"><i>I’d love to hear from you. <b>Do you have experience using the snowball or avalanche methods?</b> Let me know in the comments below.</i></p><p id="2364"><b><i>If you found this article useful, <a href="https://skl.sh/3292pjo">you can enroll in my in-depth video class on paying off debt on Skillshare here.</a></i></b></p><p id="dc51"><i>This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decision</i></p><p id="204e"><i>Originally published at <a href="https://wealthtender.com/insights/money-management/the-snowball-method-vs-the-avalanche-method/">https://wealthtender.com</a></i></p></article></body>

Living Debt-Free

The snowball method vs the avalanche method

Which Works Better and What’s the Difference

A much-debated topic in the personal finance world is what is the best way to pay off debt, the snowball or avalanche method.

In this article I will:

Review the snowball and avalanche debt repayment methods
Review how each performs with a real-life example
Tell you why “which method is better” is the wrong question

The Snowball method

The “snowball method” to debt repayment was made popular by Dave Ramsey. It is a four-step process.

Step 1: List your debts from smallest to largest.
Step 2: Make minimum payments on all your debts except the smallest
Step 3: Pay as much as possible on your smallest debt.
Step 4: Repeat until each debt is paid in full.

Why the snowball method works

The snowball method is popular because it taps into a simple truth about getting out of debt and managing money. It’s more about habits and emotions than technical knowledge.

The idea behind the snowball method is that by focusing on your smallest balance and getting that paid off quickly you gain the confidence to keep going. With each loan you clear, you begin to believe that you can accomplish your goal of getting out of debt and that keeps you focused on your mission of getting out of debt.

I like the snowball method because as I’ve written in the past if you are trying to accomplish a task that seems impossible the only way to guarantee success is to take massive action and see early results. This creates a virtuous cycle that can help you accomplish your goal.

The avalanche method

If the snowball method is about psychology, the avalanche method is about cold hard numbers.

Step 1: List all your debts from the highest interest rate to the lowest interest rate.
Step 2: Make minimum payments on all your debts except the debt with the highest interest rate.
Step 3: Pay as much as possible on your debt with the highest interest rate.
Step 4: Repeat until each debt is paid in full.

Rather than paying off the loans with the smallest balance first, you pay off the loans with the highest interest rate first. It is also a four-step process.

Why the avalanche method works

If you are the kind of person where motivation isn’t an issue and your main priority is to get out of debt as quickly and efficiently as possible, the avalanche method is for you.

When I say the avalanche method is more “efficient” I’m referring to the fact that by focusing on the debt with the highest rate of interest first, you will pay less total interest by the time you have cleared all your debts.

If you have the discipline to “stick with it”, knowing it might be a long time before you get your first “win”, this might be the route for you.

Snowball vs Avalanche

Let’s say you have the following debts.

Credit card 1: $10,000 balance and 19% interest rate
Credit card 2: $5,000 balance and 18% interest rate
Car loan: $30,000 and 9% interest rate
Personal loan: $3,500 balance and 7% interest rate

Total debt: $48,500

Combined minimum monthly payments $963

Let’s also assume you have an additional $500 to pay down your debt. This is the money you will use to accelerate your debt repayment.

If you use the snowball method

You would pay your debt in the following order:

Personal loan
Credit card 2
Credit card 1
Car loan

Using the snowball method, you would be debt-free in 40 months and would pay $9,755 in interest during that time.

If you use the avalanche method

You would pay your debt in the following order:

Credit card 1
Credit card 2
Car loan
Personal loan

Using the avalanche method, you would be debt-free in 40 months and would pay $8,908 in interest during that time.

So, which is better?

Both the snowball method and the avalanche method would have you debt-free in 40 months.
If you used the avalanche method you would save $847 in interest payments

If your measuring stick is getting debt-free in the most efficient way possible, the avalanche is the better strategy.

It doesn’t matter which route you choose

One of the points we hammer home in the Financial Mentor Program is that it does not matter which debt repayment you choose. Saving a few hundred dollars per year is nice but two factors are much more important than minimizing the amount of interest you pay.

Making sure you manage your spending to ensure you never fall back in debt
You pick a debt repayment strategy that you can stick to

Before you begin paying off debt, it’s important to create a budget that is within your means and stick to it. If you don’t address the problems that caused you to fall into debt in the first place, odds are you will end up back in debt before too long.

Nothing is more defeating than spending four years aggressively paying off debt only to start falling back into debt. Losing debt is like losing weight, it’s all about your daily habits.

It’s also important you pick whichever debt repayment strategy you can stick to. Yes, the avalanche method is the better choice on a spreadsheet. But your life is not a spreadsheet! If you think you’ll have a better chance of sticking with the snowball method, then that is the correct choice for you.

If I can use another analogy, the choice between the snowball and the avalanche is like planning a road trip.

Your destination is a debt-free life.
The snowball method and the avalanche method are two separate roads that lead to the same destination.
The snowball method is a 1,000-mile road
The avalanche method is a 900-mile road

It doesn’t matter which road you take, what matters is that you have enough gas in the tank to make it to your destination.

If you develop proper spending habits and pick a debt repayment strategy that you can stick to, nothing is stopping you from paying off your debt.

I’d love to hear from you. Do you have experience using the snowball or avalanche methods? Let me know in the comments below.

If you found this article useful, you can enroll in my in-depth video class on paying off debt on Skillshare here.

This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decision

Originally published at https://wealthtender.com