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    Debt Avalanche Method vs Debt Snowball Method

    When it comes to debt management, there are two popular strategies: the debt snowball method and the avalanche method. 

    Both of these strategies are tried and tested and have produced excellent results for borrowers in every corner of the world and across all walks of life. 

    The basic idea behind both of them is the same: make sure you pay the minimum installments on all your debts each month, and then dedicate every additional cent you can to eliminating them one by one in a particular order.

    Where the avalanche and snowball methods differ is the debts you choose to pay off first. The snowball method focuses on the smallest debts first while the avalanche method attacks the debt with the highest interest rate as a priority. 

    To understand the differences between the two methods, let’s compare the flow of actions that are involved in each one. 

    Action
    1
    2
    3
    4
    5
    6
    7
    Snowball Method
    Gather all your debts together
    List your debts from smallest to biggest
    Calculate your total monthly minimum payment
    Decide on an additional amount to pay down your debts each month
    Pay off your smallest debt first
    Roll your payment from the smallest debt into the second-smallest and so on
    Repeat the process until all your debts are repaid in full
    Avalanche Method
    Gather all your debts together
    List your debts from highest APR to lowest
    Calculate your total monthly minimum payment
    Decide on an additional amount to pay down your debts each month
    Pay off your highest APR debt first
    Roll your payment from the highest APR debt into the second-highest one and so on
    Repeat the process until all your debts are repaid in full

    In the table above, the actions that are the same in both the snowball and avalanche strategies appear in green. The steps that are different appear in red. As you can see, the two strategies have a lot in common. 

    Both methods are based on organization, extra payments, rolling the payments from one debt into the next as soon as it’s paid off, and always making all your minimum payments to stay in good standing with your creditors. 

    The main difference between the two methods is the specific debt that is repaid first. 

    • The snowball strategy targets smaller debts first - this creates a strong sense of progress because you’ll be able to strike a few debts off your list in the first few months. 
    • The avalanche method focuses on clearing the debt with the highest APR first - this makes excellent financial sense because it lets you pay your way through the interest faster and pay less overall.

    Both methods have their share of benefits and drawbacks - but they produce excellent results. Let’s compare them in more detail.

    So Which Way is Better? 

    Overall, the decision comes down to your personality, way of thinking, and relationship with money. 

    Let’s say you have the following debts outstanding and $600 a month to repay them:

    • $2500 in credit card debt at 6% (minimum payment: $100)
    • $3000 in personal loan debt at 5% (minimum payment: $125)
    • $4000 in auto loan debt at 8% (minimum payment: $125)

    The snowball method will have you pay your minimum payments each month and commit your extra income to pay off the credit card loan, followed by the personal loan and finally the auto loan.

    The avalanche method will first focus on the high APR auto loan first, followed by the credit card loan and finally the personal loan. 

    While both approaches could have you debt-free in 28 months, the avalanche method will save you a small amount in interest payments - but only if you follow it regularly and don’t stop making payments. 

    The major advantage of using the snowball payment method is psychological. By paying off small debts first, you’ll experience positive feelings and feel motivated, striking off your debts one by one. 

    Since most financial decisions involve certain levels of emotion, the snowball method is more likely to be successful for the majority of people looking to reduce their debt. 

    Bottom Line 

    Both methods are powerful debt reduction strategies that can help you pay off your debts and achieve financial freedom. 

    When choosing between these two methods, you’ll need to ask yourself whether constant motivation from small wins is more important than long term savings on interest. 

    The most important thing is choosing the method that works for you, staying on course, and eliminating your debts for good.