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Finance 101: Debt Avalanche vs Debt Snowball
17 May 2021
We talked about how to save more money in the previous article. Now let's talk about something that's less fun but equally important: how to pay off debt.
We'll all land in debt one way or another (that is of course, unless you have the backing of a trust fund), perhaps most commonly through student or housing loans. But there are other more pesky variants of debt, like credit card debts with exorbitant interest rates, or debts borne out of circumstance, such as an unexpected medical bill.
Debts are no fun and they literally take the life force out of you.
Unfortunately, there isn't a magic wand you can wave to make your debts go away. But you can deal with debt in smarter ways to make it go away quicker.
Before we get into today's debt mangement strategies proper, let's begin with some hard truths.
Look at your debts squarely
When there is a mountain of debt piling up every month, the last thing anyone wants to do is to look at the number and feel depressed all over again.
But the first step in dealing with your debts is to look at it squarely. Say goodbye to debt denial.
From there, work out the reasons why you landed in debt. Was it poor spending habits? Consider canceling your credit card. Was it a lack of forward planning? Maybe speak to someone whose more financiall savvy to learn what you can do. Was it because you didn't have a large enough Start building a substantial fund now. Basically, identify the reason and find the right remedy for it.
Once you have the numbers down, it's time to work out a game plan. We did some research and found these two popular strategies that might help you eliminate debt quicker.
#1 Debt Avalanche Method
Following this method, you should pay off accounts starting from the one with the highest interest rate.
So here's what you need to do.
- Make the minimum payment on all accounts
- Pay however more you can on the account with the highest interest rate
- Once you've settled your debts on that account, move onto the account with the second highest interest rate by paying the minimum amount + what you were paying for the settled account + any extra amount
This method makes sure you tackle the account with the highest interest first, so you incurr less damage at the end of the day.
#2 Debt Snowball Method
One of the downsides of the debt avalanche method is that you might not feel like you're making progress, especially if you're dealing with larger debt accounts first. It'll take a longer time before you can tick anything off your list.
If you're someone that functions better when you feel motivated and accomplished, consider the debt snowball method.
Following this method, deal with the account with the lowest balance first, then work your way up.
- Make the minimum payment on all accounts
- Pay however more you can on the account with the lowest balance
- Once you've settled your debts on that account, move onto the account with the second lowest balance by paying the minimum amount + what you were paying for the settled account + any extra amount
You can accumulate small wins along the way when you use this method, hence the name snowball.
However, do note that this method will mean delaying payment on the account with the highest interest rate. You will end up incurring more costs at the end of the day. Ultimately, you should know which method works best for you to deal with your debt successfully.
In the meantime, save more, earn more, and get to work chipping away at your debt!
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