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Snowball vs Avalanche Debt Payoff

The Snowball Method vs. the Avalanche Method: Which Debt Payoff Method is Right for You?


If you're struggling with debt, you may be wondering which debt payoff method is right for you. There are two popular methods: the Snowball Method and the Avalanche Method.




The Snowball Method


The Snowball Method is a debt payoff method where you focus on paying off your smallest debts first. Once you pay off a debt, you roll the amount you were paying into the next smallest debt, and so on. This method is based on the idea that it's more motivating to see debt disappear, even if it's not the debt with the highest interest rate.


The Avalanche Method


The Avalanche Method is a debt payoff method where you focus on paying off your debts with the highest interest rates first. This method is based on the idea that you'll save the most money in the long run by paying off your debts with the highest interest rates first.


Which Method is Right for You?


There is no one-size-fits-all answer to the question of which debt payoff method is right for you. The best method for you will depend on your individual circumstances and preferences.


If you're more motivated by seeing debt disappear, then the Snowball Method may be a good option for you. If you're more interested in saving money in the long run, then the Avalanche Method may be a better choice.


Here is a table comparing the two methods:


Snowball Method

* More motivating

* Easier to stay on track

* Can be less stressful

* May take longer to pay off debt

* May not save as much money in the long run


Avalanche Method

* Saves more money in the long run

* May be easier to budget for

* Can be less stressful if you have high-interest debt

* Less motivating

* Can be more difficult to stay on track


Ultimately, the best way to decide which method is right for you is to try both and see which one works better for you. You can also use a debt payoff calculator to compare the two methods and see which one will save you the most money.


Calculation Example


Let's say you have the following debts and are budgeting an extra $100 per month to payoff debt earlier, which method would be most effective to help pay down your debts sooner:

  • Credit card 1 debt: $2,500 at 12% interest

  • Credit card 2 debt: $10,000 at 25% interest

  • Student loan debt: $18,000 at 6% interest

  • Car loan: $9,000 at 5% interest

Minimum Monthly Payments

The minimum monthly payments on these debts would be:

  • Credit card 1 debt: $50

  • Credit card 2 debt: $200

  • Student loan debt: $300

  • Car loan: $170

Snowball Method

If you use the Snowball Method, you would start by adding the $100 per month to pay off the credit card 1 debt. Once that's paid off, you would roll the $150/month you were paying on the credit card 1 debt into the car loan for a total of $320 towards that debt. Then, pay towards the credit card 2 debt. Lastly, you would pay off the student loan. Still making the minimums on each other loan as you snowball payments into the next once paid off.

Your debt payoff timeline would look like this:

  • Credit card 1 debt: 18 months

  • Car loan: 40 months

  • Credit card 2 debt: 63 months

  • Student loan debt: 66 months

Total time to pay off debt: 66 months

Total interest paid: $14,000


By adding the $100 extra per month and snowballing your efforts you would have reduce the time to payoff these debts by 15 months and save $5,000 in additional interest.


Avalanche Method

If you use the Avalanche Method, you would start by adding your additional $100 to the highest interest rate debt paying down credit card 2 for $300 per month. Once that's paid off, you would roll the $300/month you were paying on credit card 1 to credit card 2, followed by the student loan. Finally, you would pay off the car loan with the lowest interest rate.


Your debt payoff timeline would look like this:

  • Credit Card 2 debt: 54 months

  • Credit Card 1 debt: 56 months

  • Student Loan debt: 62 months

  • Car loan: 60 months

Total time to pay off debt: 62 months

Total interest paid: $11,000


By adding the $100 extra per month and avalanching your efforts you would have reduce the time to payoff these debts by 21 months and save $8,000 in additional interest.


As you can see, the Avalanche Method will save you an additional $3,000 in interest over the life of your debt. However, you may find the Snowball Method may be more motivating for you, and it may be easier to stay on track. Either way, the improvement of just $100 additional and a method to paying down your debts can drastically reduce the interest paid and time to pay them off.


The most important thing is to start paying off your debt. The sooner you start, the less interest you'll pay and the sooner you'll be debt-free.


Conclusion


The Snowball Method and the Avalanche Method are both effective debt payoff methods. The best method for you will depend on your individual circumstances and preferences. If you're not sure which method is right for you, try both and see which one works better for you.

I hope this blog post has been helpful. If you have any questions, please feel free to leave a comment below.


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