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How to Use the Snowball vs. Avalanche Method for Debt Repayment

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How to Use the Snowball vs. Avalanche Method for Debt Repayment

Let’s be honest, looking at a pile of debt can feel utterly terrifying. The sheer number can be paralyzing, and it's easy to just feel stuck. But you can take control, and there are strategies designed to help you chip away at those balances and achieve financial freedom. Today, we’re diving into two popular debt repayment methods: the snowball method and the avalanche method. Understanding the difference between them can make a huge difference in your success.

What's the Difference?

Both methods focus on aggressively paying down your debts, but they differ in how they approach the process.

  • The Snowball Method: This method focuses on paying off your smallest debts first, regardless of their interest rates. You list your debts from smallest balance to largest and make minimum payments on all debts except the smallest one. You then throw all extra money you can afford at that smallest debt until it's gone. Once that's tackled, you move on to the next smallest debt, and so on.

  • The Avalanche Method: This method prioritizes debts with the highest interest rates. You list your debts from highest interest rate to lowest, and make minimum payments on all debts except the one with the highest rate. You’ll be paying more on the high-interest debt, which, in the long run, will save you the most money.

Let's Break It Down with an Example:

Let’s say you have these debts:

  • Credit Card A: $500 balance, 18% interest
  • Medical Bill: $1,000 balance, 0% interest
  • Student Loan: $5,000 balance, 6% interest

Using the Snowball Method: You'd tackle the 500creditcardfirst,eventhoughithasahighinterestrate.Oncethat′sgone,you’dmovetothe500 credit card first, even though it has a high interest rate. Once that's gone, you’d move to the 1,000 medical bill, then the $5,000 student loan.

Using the Avalanche Method: You'd focus on the $5,000 student loan (highest interest) first, paying it down aggressively while making minimum payments on the other debts.

Which Method Should You Choose?

  • Choose the Snowball Method if: You’re motivated by quick wins. Seeing those smaller balances disappear can provide a powerful psychological boost and keep you on track. It’s great if you need a mental 'win' to keep you motivated.

  • Choose the Avalanche Method if: You’re focused on saving the most money in the long run. Paying off high-interest debts first will minimize the total amount of interest you pay over time, even if it takes a little longer to start seeing those initial wins.

Resources to Help You Get Started:

No matter which method you choose, the key is to start today. Don't let debt overwhelm you – take control and build a plan that works for you.