Total credit card balances in the US have reached $420 billion. Needless to say, most Americans have some kind of debt.
The kind of debt varies from household to household, but we have a lot as a nation.
And debt can cause huge amounts of stress. And the more couples fight over money, the more their chances of divorce go up. Whether you have walked down the aisle yet or not, if you want to help your marriage, work on your debt.
People tend to look to one of two methods when paying down debt snowball vs avalanche. Each has merits and drawbacks. Keep reading to decide which method will serve you best.
You should keep in mind that most debt payment plans involve lifestyle sacrifices. Place debt as the top priority under rent, food, gas, insurance, utilities, etc.
Debt Snowball Method
The debt snowball requires listing all debts from lowest to greatest. You set as much money aside for paying debts as possible. You want to have enough to pay greater than the minimum on one debt.
Let’s say your total minimum payments equal $550. You must then find $10-50 extra in your budget. Where can it come from?
Make coffee at home instead of buying it. Doing this twice a week could save 15 per month.
Buy less expensive food at the store. This doesn’t mean skimping on quality, wait for things to go on sale and buy them then. You can also buy things you need for the month in bulk. If it saves you an extra $20, you are set.
Once you have found the extra, apply it to the debt with the lowest balance. Once you pay that debt off, add the amount you were paying on it to the next balance on the list.
Do not spread it out across the remaining balances, it all goes to the new lowest balance. Keep working your way up the list, throwing more and more money at each successive debt.
Debt Avalanche Method
The debt avalanche takes a similar approach, but it can result in saving more money. You line up your debts in a list, but the priority goes to highest interest rates.
Interest rates cost you the most when you only pay the minimum. On the debt with the highest interest rate, you want to commit all your extra funds. Extra payments go to the principal amount and reduce your interest costs longterm.
You still roll entire amounts over to the next item on the list. And you still throw any extra money at debts each month.
Snowball Pros and Cons
The snowball method has strong psychological benefits. You get an early victory and victory inspires you to continue working.
Plus, as relationship work goes, quick victories build a stronger bond with your mate.
At the end of the day, the biggest pro here is motivation.
But there can be downsides to the snowball method. As stated above, the earlier payments may not hit the highest interest rate first. And interest costs you a lot of money in the long run.
Avalanche Pros and Cons
In some cases, the avalanche method will pay off the debt faster in the long term. Further, if you have debts with very high interest, you save money.
But this depends greatly upon your situation and your personal debt.
Many don’t recommend this method because it doesn’t motivate at the beginning. And you need the most motivation at the start.
If your highest interest rate somehow has the highest amount due, watch out. You might wait a year or more before you manage to pay off the first debt.
How to Choose Snowball vs Avalanche
Your situation may need debt consolidation to help. Click here to see if that option works best for you.
Your situation, goals and personal motivation will govern the choice of snowball, avalanche or consolidation.
Let’s say you have two dozen pieces of debt ranging from $100 – $800. That crushing weight needs some relief.
To begin, stop using anything that will increase debt until everything has been paid off. Then begin your snowball with the lowest amount. By next month you will be suffocating under one less bill.
The next one may take more time than that, but not much. Because you will be throwing an extra hundred at it each month. In a year’s time, maybe you are down 5-6 bills.
That situation rings of desperation and needs a boost of freedom. In this case, choose the snowball.
What if you have a ton of motivation and just need direction? You have 8 credit card or loan payments. Some with very high interest and some with very low.
Your situation hasn’t made you desperate or suffocated you. But you want to do away with all the extra interest you are paying. Your situation needs an avalanche.
You don’t need to start fast. You need to feel like you are hitting your debt as hard as you can. And you want to be thrifty about it.
You’re a defensive end with a clear shot to sack the quarterback, your debt. Yeah, it may be the first quarter, but you want to make an impact that on the whole game.
Avalanche will do that for you. You will only need keep playing every minute no matter what.
Examine, Plan, Execute
Before you make any decision about your debt, look at all of it. Arrange it in whatever manner you choose. But once you pick snowball vs avalanche, stick to it.
Once you have it arranged in your preferred method, find the money needed. You can find tips on making extra money with side jobs here. Sometimes ten hours a week makes all the difference.
Once you have your plan, tell someone who will keep you accountable. And with that, you are ready to hit the ground paying.