When you're dealing with multiple debts, it's difficult to know where to start. Do you strike the credit card? Or strike that student loan? There are two primary strategies for paying off debt that can assist you in staying on track and, at last, becoming debt-free: the debt snowball method and the debt avalanche method.
This article will describe both approaches, compare debt payoff plans, and assist you in identifying which approach is best for you.
Debt snowball approach entails payment of the debts from the smallest to the largest balance, regardless of whether the interest rates are high or low. You want to experience some quick wins that will give you an extra motivation and make it easier for you to continue.
The following is the step-by-step process on how to use the debt snowball approach:
This is also referred to as the "pay off smallest debt first" plan due to the fact that it offers with the guarantee of paying a bill at a time.
Suppose you have three debts:
You'd begin with the debt snowball method, settling the credit card initially, though it's not the highest-interest one. After that, you'd go on to the personal loan, then the student loan.
The important thing is to get something moving and keep yourself energized.
The avalanche approach to paying debts is another method of paying debt. Rather than trying to pay the largest balance first, in this method, you pay by prioritizing interest rates. You pay the debt that has the highest interest rate and work your way down.
This is how to apply the avalanche technique:
This is sometimes referred to as the "highest interest strategy" and it will save you more money in the long run because you're paying less interest.
Based on the same debts as above:
You’d start with the credit card because it has the highest interest rate. Then you’d move to the personal loan, and finish with the student loan.
Although the credit card does hold the smallest balance in this case, it's not necessarily always so. The highest interest debt at times may be one of your largest.
If you're trying to balance debt repayment strategies, here's a quick way to put them into perspective.
The snowball method of debt repayment works well because you get instant gratification, and it could energize you. But you will end up paying more interest in the long term.
The debt avalanche approach will save you money in the long run. You'll pay less interest and likely be debt-free faster. But it may seem like it's taking an eternity at first because your smallest debts may take a rather long time to eliminate.
Neither approach is incorrect. It's simply a question of what is most important to you—psychological victories or ultimate savings.
If you're wondering "which debt to pay first?"—it's based on your personality and spending habits.
If you require inspiration and mini-wins, the "pay off smallest debt first" approach will likely be best for you. You'll be making progress in no time and feel great checking debts off your list.
If you're the kind of person who enjoys staying on track to be effective and to spend as little money as possible, the maximum interest approach is the way to go.
Both techniques have the key to staying on course and making on-time payments.
Let's examine two different individuals applying these strategies to illustrate how they work in practice.
Maria has three debts:
She likes debt snowball method since she wants to see the change within a short period. She sends all her extra money towards the $300 store credit card and pays the minimums on the others.
She pays the store card in thirty days, feels good, and then attacks the medical bill. Making progress is exhilarating and keeps her on track.
Eric has three things he owes:
He chooses the avalanche method. Although the balance is mostly on the credit card, he attacks it first because it has the highest interest rate. Eric saves himself hundreds of dollars on interest over the long term.
He'll take longer to pay off the initial debt, but he remains committed because he knows he's saving money in the long term.
These debt strategy examples demonstrate that both approaches work just fine—it really does come down to your personal style.
Let's go through the good and the bad of each approach without resorting to any charts.
For the debt snowball system, the most positive aspect is that it gets you to feel successful immediately. You tackle smaller bills first, and this can give you enough confidence to continue. The downside is that it is not always the least expensive way out of debt, particularly if your bigger bills have a lot of interest.
For the avalanche approach, the best method is saving interest. It's probably the quickest way to be debt-free. The only problem is that you may not realize that you are getting there as soon as, particularly if your initial debt is enormous.
Yes. Some begin with the debt snowball technique in order to feel successful, then transition to the avalanche technique in order to save even more dollars.
For instance, you might pay off a couple of small debts early to feel an early win, and then apply the high-interest strategy to the remainder.
This hybrid strategy combines the benefits of both: motivation and efficiency.
Getting out of debt is not just a matter of selecting a strategy—it's about seeing it through. Here are some tips to keep you motivated regardless of which approach you use:
If you're one who prefers having immediate wins to be able to stay motivated, the debt snowball approach would be ideal for you. Paying off the low balances first could give you that emotional high you need in order to be able to continue.
The truth is, whatever method works for you is the best way. If you pay off the lowest balance first or pursue the highest interest rate, it matters not, as long as you start.
This content was created by AI