Debt in this country and around the world has become commonplace. This can be attributed to uncontrollable spending, desire to appear a certain way or simply to obtain the latest gadget. If you add on the increased use of credit cards, then you have a recipe for individuals who are solidly in debt. While debt can hinder your investment growth and cash flow, there are a couple of methodologies to assist in you getting out of debt. The two methods we’ll be discussing is the debt snowball and the debt avalanche.
While both set out to accomplish the same result, each goes about the task ever so slightly. Everyone operates differently and knowing the methodologies of both can allow you to find the one that’s right for you.
Debt Avalanche Method
First on our list is the debt avalanche. The debt avalanche is used in eliminating debt while attempting to save you money on interest. How this method works is you begin by listing all your debts in order by highest interest rate to the lowest. Ideally, you’ll pay off the higher interest debts quickly, saving you months or even years’ worth of interest.
This is a wonderful method if you are extremely motivated and saving a little bit of money is one of your main goals. However, one of the drawbacks you may see is your largest debt may have the highest interest rate. While this isn’t terrible, it can be challenging because it may take a while before the debt is paid off, risking demotivation. It’s a good feeling to cross items off the list and consider then “done”, you know? But if you’re able to stick to it, the debt avalanche can be an extremely effective method.
To properly utilize the debt avalanche, you’ll list out your debts and begin paying the minimum payments on all of them except for the first debt. This debt, you will pay as much money as you can towards, eliminating the principal balance as fast as possible. Once the debt has been eliminated you will take those funds and apply it to the next debt and so on. By the end of the process, you will be quickly eliminating debt and on your way to financial well-being.
Debt Snowball Method
Next is the debt snowball, which works in a very similar manner to the debt avalanche. With the debt snowball, the focus is to incentivize and feed momentum quickly. Starting the debt snowball, you will need to list your debts in order from smallest to large by balance size.
Like the debt avalanche, you’ll begin paying minimum payments on all the debts except for the first one. With all other free cash flows and extra money, you’ll put that towards the first debt. Once that’s been paid off, you’ll take those monies and apply them towards the next, and so on. The goal here is by eliminating debt items quickly, you’ll see tangible results and hopefully fuel your momentum to continue eliminating debt. The drawback to this method is you will pay more in interest than if you were to use the debt avalanche.
Regardless of your chosen path, the idea is to better your financial health for the future. Everyone is different and it’s up to you to decide which is better. No matter your selection, keep in mind the end goal is better financial health and ultimately financial freedom.