Comparing Successful Strategies For Rapidly Paying Off Debt!
Blog | October 4th, 2021
Do you feel like you're drowning in debt? If so, you're not alone. The average American has over $90,000 in debt, and that number is likely to increase each year.
Fortunately, even if you have significant debt and don't make much money, help is available. The two most common debt-reduction strategies are the debt snowball and the debt avalanche. Let's take a closer look at how each strategy works, their pros and cons, and everything else you need to know.
Types of Debt
Debt includes any money you owe. The most common types of consumer debt products include:
Note that both the debt snowball and avalanche methods tend to focus more on credit cards, personal loans, and student debt. Because mortgages typically take decades to pay off and can have a fixed rate, they don't always fit smoothly into debt reduction techniques, so keep that in mind as you evaluate each strategy.
The debt snowball method is when you pay off your debts from smallest to largest. The idea is to get the “ball rolling” on debt resolution. The theory is that as you eliminate each debt, the progress you've made will motivate you to keep going with your debt management plan.
For example, let's say you have three outstanding debts:
A credit card debt of $1,000 with a $25 monthly minimum
A credit card debt of $5,000 with a $100 monthly minimum
A personal loan of $15,000 with a $400 monthly payment
With the debt snowball method, you'll tackle the $1,000 credit card debt first.
To start, you'll determine how much money you can put towards debt repayment, which is a total of all the minimum payments plus the extra you can afford.
Each month, you'll pay the minimum for credit card #2 and your personal loan. Then you'll put what's left of the money you've budgeted for debt towards credit card #1.
When you've paid off the first credit card, you'll then move on to #2, paying its minimum plus whatever you'd paid to #1 each month. Each time you start paying off a new debt, you're able to pay a larger sum because you're adding whatever you were paying to the previous debt.
The Benefits of the Debt Snowball Strategy
The major benefit is psychological. Researchers found that when people experienced small victories as they tackled their debt, they remained more motivated to continue. Even if the debt they prioritize doesn't make the most financial sense, the debt snowball strategy can help people stay engaged for years and decades until all debt is paid off.
The Potential Problems with Debt Snowball
From a purely financial standpoint, the debt snowball method isn't always logical. Your smallest debt doesn't necessarily have the highest interest rate. While you're paying it down, other debts with larger interest rates might be growing. By the time you start paying down those other debts, you could wind up owing significantly more than if you'd paid them first.
The debt avalanche method takes the opposite approach. You arrange your debts in order of interest rate, tackling the one with the highest rate first. While specifics vary, credit card debts will typically have the highest interest rates.
Payments work the same way as with the debt snowball. You'll determine how much you can afford each month for total debt repayment, pay the minimum balance on most of your debts, and then put the rest towards a specific debt (in this case, the debt with the highest interest rate).
As with the debt snowball technique, you're paying more money on a new debt as you pay off the previous one.
The Benefits of the Debt Avalanche Strategy
Purely based on numbers, the debt avalanche strategy creates the absolute lowest amount of debt for you to pay off. The highest interest rates don't have as much opportunity to climb during this method as they do under the Snowball strategy.
The Potential Problems with Debt Avalanche
It's slow. You can lose motivation. If you owe a substantial amount of money at a high interest rate, which is a common situation if you have credit card debt, paying it off could take years. The lack of visible progress can make you feel overwhelmed. You might want to give up on your debt repayment plan entirely at times.
Which is the Right Option for You?
Think of debt repayment as similar to dieting or working out. Motivation plays a key role in your success, so choose the method you find the most comfortable and easy to do. If you're a true “by the numbers” person who can focus on the long term, give the avalanche method a try. If you feel you'd respond better to quicker, more emotional rewards, go with the snowball.
No matter which method you choose, if you stick with it, you can free yourself from the weight of debt!