What is the difference?
There are two common methods people can use to pay off debt: the “snowball” method and another called “avalanche”.
With the snowball method, debts are paid off starting from the lowest balance.
Each method has its advantages and disadvantages, so before you decide how to tackle your debt, it’s important to understand what each strategy involves and why one approach may be better for your specific situation.
Snowball Debt
The snowball debt method starts with a list of all your debts organized by interest rate from highest to lowest.
To get started, you should make the minimum payments on your loans. Then, you should throw all your extra money towards the debt with the highest interest rate. This is the Mastercard in our example, which has the highest interest rate of 19%. The idea is that as you pay down and eliminate that 19% debt, the less you’ll pay in compound interest.
Once you’ve eliminated the debt on the Mastercard, then tackle the Visa balance, which has the second highest interest rate of 13%.
It will take you a long time to pay off the Visa, as it has the highest balance of $7,500. Stick with it. At any time you like, you can start paying off the lower interest debt.
Debt Snowball Method
According to the debt snowball method, you should throw every extra penny you have at the debt with the lowest balance first, regardless of the interest rate.
If you use the snowball method, you should rearrange the list mentioned above as follows:
Student loan of $1,900: 5%, lowest balance
Mastercard of $2,500: 19%, second lowest balance
Car loan of $4,000: 8%, third lowest balance
Visa card of $7,500: 13%, highest balance
Just like with the snowball method, you will only pay the minimum on all your debts, then throw every extra penny at the debt with the lowest balance, regardless of the fact that in this specific case it has the lowest interest rate.
Note: The idea behind this method is that paying off the lowest balance loan will give you the psychological feeling of winning when you face that you have paid off that debt. This psychological win will motivate you to continue saving money and paying off other debts one by one.
Although this method gives you a more immediate feeling of victory, it may cost you more. Making only the minimum payment on the debt with the highest interest rate means you will pay more in interest compared to the snowball method.
Tip: If you have a smartphone, there are apps that help you organize, track, and eliminate your debts faster.
Conclusion
Personal finance is a personal matter. Paying off debt can be like dieting. Sure, there are perfect meal plans, but let’s be realistic: most people won’t stick to a perfect diet. The best diet is the one you’ll stick to.
Paying off debt is similar. Be honest about creating a budget that fits your personality and motivates you. You will pay more in interest if you don’t stick to your debt repayment plan.
Tip: Experimentation can also be acceptable. If the snowball method seems more appealing to you right now, you can try it out for a few months. If you then find that it doesn’t work, there is no reason not to switch to the avalanche method.
That
You may have a good plan idea, but that doesn’t mean you need to stick to it 100% of the time, 365 days a year. Things change, life throws curveballs at you, and you need to adapt. This sometimes means changing your financial strategies. Don’t beat yourself up if the method you tried first didn’t work. Keep trying until you find something that works.
Frequently Asked Questions
Is the snowball debt better or the stacking debt?
Both of these debt reduction strategies will help you reduce or even eliminate your debt. The snowball method gets praise when it comes to saving money. Its focus on paying off the debts with the highest interest rates first means you’ll pay less in interest over time, as long as you stay motivated and on track. Proponents of the snowball method say that regardless of the additional cost, it will help keep you motivated and build momentum.
How does the debt snowball work?
The snowball debt repayment strategy starts with a list of your debts, from the smallest balance to the largest. You pay the minimum on all your debts, then any extra amount you have in your budget goes toward paying off the debt with the smallest balance. Once that’s done, you move on to the next smallest debt, and so on.
Source: https://www.thebalancemoney.com/debt-snowball-vs-debt-stacking-453633
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