Debt snowball vs. debt avalanche: understand the difference
Snowball and avalanche methods can solve your problem of accumulating debt. However, this should not be followed blindly. So readn on to learn!
Choose the best method to get out of debt
Debt Snowball vs. Debt Avalanche: no, this is not a Canadian ice hockey team match. They are well-known methods of paying off debt.
If you’ve come this far, you must wonder: which is the best? Read this article to find an answer, unlike anything you’ve ever read on this subject!
Debt snowball vs. debt avalanche: main differences
We are looking at two of the favorite methods of paying off debt. Both share something in common that made them so famous: practicality.
To use them, you don’t need knowledge of finance or mathematics. Also, with these, the question, “which bill should I pay now?” stop existing.
In effect, you will always know what the next step is. In both methods, you will have the order to make payments.
The big difference between the snowball and avalanche methods is the criteria to decide which bill you should pay first.
This may seem small, but it makes all the difference. Below, learn more about each method and its main advantages and disadvantages.
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What is the debt snowball method?
The snowball method is known to generate “small rewards” early in the account liquidation process.
Only those with many bills will know how rewarding it is to get rid of at least one. Thus, even the smallest bills generate joy and a sense of accomplishment.
To generate this stimulus, the snowball method recommends prioritizing smaller debts.
To apply it, just organize your bills from the cheapest to the most expensive. Next, remove them in exactly that order.
That’s without forgetting to make the minimum payments on all other accounts. Below, check the pros and cons of using this method.
- No software or calculations: anyone, regardless of education, can apply;
- Allows you to close accounts faster compared to the avalanche method;
- Paying small bills every month can be an impetus to keep applying the method until you are completely debt free;
- While you’re paying your bills, you’re building good financial habits.
- By “turning a blind eye” to interest rates, you risk paying more to pay off all your debts;
- All your cash reserves may be consumed when trying to apply this method;
- Your debt could skyrocket if the highest interest rates are on the highest debts.
What is the debt avalanche method?
The avalanche method is another way to say “goodbye” to your bills. You’ll also need to settle your debts, but with different criteria to make payments.
This method prioritizes accounts that charge higher interest rates. After all, the higher the interest rate, the more your debt will tend to grow.
So that’s exactly what we want to avoid, isn’t it? Therefore, you should order your debts from the highest interest rate to the lowest interest rate.
After that, just pay them in the sequence you’ve already defined. Finally, don’t forget to make the minimum payments on all other accounts that are in order.
See how this method can help you. Also, know the disadvantages of relying on it.
- Decrease the payment of interest rates;
- Allows you to stop the growth of your debt by paying first the accounts with the highest growth potential;
- It’s a simple and practical schedule for paying off debt that anyone can follow;
- Sometimes, this may be the shortest way out of the “debt pit.”
- Generally speaking, this method can be slower than the snowball method;
- If the debts with the highest interest are the ones with the highest value, you can spend more time paying them off;
- Those who need short-term stimulus to meet the payment schedule may become discouraged before paying it off;
- Generally, you will have to wait longer until you see the first results.
Snowball vs. avalanche method: which one is better?
As you can see, there isn’t a “debt snowball vs. debt avalanche” rivalry. These are methods that, like everything else, have positives and negatives.
So, to find the best method, you should consider the pros and cons of each and choose the one that makes the most sense.
However, whichever method you choose, here’s a tip that can help you greatly.
The best tips to help you use both methods
It’s not always a good idea to blindly follow one of these methods. Thus, there is a way to know if you should continue with the method as it is or prioritize a specific account.
If you use the avalanche method, average the value of your debts. Some online calculators can make this task easier.
If any accounts have a cash value greater than 2x the calculated average value, you should prioritize them.
However, if you choose the snowball method, average the interest rates on your accounts. If any account has an interest rate twice the average, prioritize it.
These tips will prevent you from accumulating very large debts or interest rates that can make your debts grow inordinately. After each month, repeat it!
Lastly, if you need a household budget never to have to worry about a snowball or an avalanche again, we’ve got you!
Maintaining this type of control is simpler than you might think!
Just read the article below and understand everything you need to know about it.
We've broken down the top household expenses so you can improve your budget and get some good tips for saving on each of the major expense categories. Read on to learn more!
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