What does snow have to do with debt?
Debt can weigh us down – almost like a heavy snow. Maybe that’s why the names of the two most popular debt reduction methods have to do with the white stuff. The Snowball Method and the Avalanche Method are both ways of becoming debt free.
Deciding to get out of debt is a great decision which will have a positive impact on many areas of your life. However, it isn’t enough to just decide to get out of debt, you’ll need to make a plan.
Let’s compare the two main debt repayment strategies so you can decide which one will work best for you. The one you choose may depend on your personality and your goals.
Both methods work on the same idea: You make your minimum monthly payment on each debt, then any extra available funds are applied to the first selected debt. When you pay off that balance, you apply the freed-up money toward your next debt. Then continue until you are debt free.
The difference comes in the way you order the debts for repayment. Have a look at the two debt freedom methods below and decide which one is for you.
SNOWBALL
HOW IT WORKS
With the snowball method, you pay off your debt with the smallest outstanding balance first.
AVALANCHE
HOW IT WORKS
With the avalanche method, you pay off your debt with the highest interest rate first.
PROS : Snowball
Your number of debts will decrease more rapidly, which may give you a sense of accomplishment and encourage you to continue.
PROS : Avalanche
This is the fastest way to eliminate debt, and you’ll end up saving more on interest payments.
CONS : Snowball
It may take longer to become debt free, and you will probably pay more in interest.
CONS : Avalanche
Your number of debts may decrease more slowly.
BEST FOR : Snowball
Those who feel overwhelmed by the number of debts they have and those who may need to see quick results to stay motivated.
BEST FOR : Avalanche
Those with high interest debt who are motivated to become debt free and pay as little interest as possible.
Snowball Example
Make minimum payments on each debt plus as much extra as possible each month toward the smallest debt balance. As one debt is paid off, the extra money is put toward the next lowest debt balance.
£700 credit card at 18 % interest
£3,000 credit card at 25% interest
£8,000 bank loan at 5% interest
£10,000 car loan at 8% interest
Avalanche Example
Make minimum payments on each debt plus as much extra as possible each month toward the highest interest debt. As one debt is paid off, the extra money is put toward the next highest interest debt.
£3,000 credit card at 25% interest
£700 credit card at 18 % interest
£10,000 car loan at 8% interest
£8,000 bank loan at 5% interest
Which Method Should You Use?
Everyone is different and each method will appeal to certain people. The best method for you comes down to your personality, your total amount of debt, your interest rates and how motivated you are to become debt free as quickly and cheaply as possible.
With the Avalanche Method you’ll pay off debts faster and save on interest, but if you’re a person who needs to celebrate quick wins, then the Snowball Approach may suit you better.
You have to be realistic, and the best plan for you is the one you will stick with until you are debt free.
Genistar’s complimentary Financial Plan can help you move towards financial freedom – and that includes debt freedom. Contact your Genistar representative for more information or contact us here.
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The information provided on this website is for educational or informational purposes only. Please refer to our legal disclaimer for further information.
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