When paying down personal debt, it can be helpful to do so in a strategic way, with proven methods to help you manage payments. Two common methods — the “snowball method” and the “avalanche method” — can help you approach debt in a clear, organized way. Understanding these two strategies, and identifying which may be best for you, can help you tackle your debt confidently and with a plan. 

The Snowball Method

The snowball method is a popular debt-repayment strategy, in which you focus on paying off the smallest debt first, while also making minimum payments on larger debts. Once the lowest-balance debt is paid off, you apply that payment to the next smallest debt and so on, creating a “snowball” effect.

You might choose to use snowball method because it can provide a psychological boost by quickly eliminating smaller debts, which can help to build motivation and momentum for tackling larger obligations. Plus, this approach can provide a sense of progress and accomplishment, making it easier to stay motivated throughout the debt repayment process, which can sometimes be stressful.

Advantages of the Snowball Method

While the snowball method helps you make progress on your debts, the primary benefits are largely psychological. This approach can help you feel like you are actively chipping away at your debt by quickly eliminating smaller obligations, and keep you motivated to continue regular payments.

Drawbacks of the Snowball Method

The main drawback of the snowball method is that it may not be the most cost-effective strategy, as you can sometimes end up paying more in interest over the long term. Additionally, larger debts may take longer to pay off, which can be discouraging for some people who want to be quickly debt free.

The Avalanche Method

The avalanche method is a debt reduction strategy in which you prioritize paying off debts with the highest interest rates first. People with larger debts and higher interest rates often elect to use this method, since it can potentially save them more money on interest in the long run.

You might choose this method because prioritizing debts with the highest interest rates can help to pay off debt faster, and with less money spent on interest payments. This approach can be particularly effective for people with multiple high-interest debts, such as credit card debt.

Advantages of the Avalanche Method

The core advantage of the avalanche method is that you may potentially save more money on interest in the long run by prioritizing higher interest rate debts. This can be particularly beneficial for people with high-interest obligations. Additionally, it offers a more strategic approach to debt repayment by targeting the most costly debts first.

Drawbacks of the Avalanche Method

The main drawback of the avalanche method is that it may take longer to see progress on smaller debts. This may be discouraging for people who want to see quick progress and wins in paying off obligations.

Comparing the Snowball Method vs. Avalanche Method

The aim both methods is the same: to address debt systematically, and help you pay off your obligations. Indeed, there are some similarities. But there are also key differences to know.

Snowball Method vs. Avalanche Method: Similarities

Both the snowball and avalanche methods are debt-repayment strategies that involve making regular, often monthly payments toward debt obligations. Both can help to reduce debt and improve financial health and stability over time.

Snowball Method vs. Avalanche Method: Differences

The main difference between the snowball and avalanche methods is the order in which you pay off debts. The snowball method prioritizes the smallest debts, while the avalanche method prioritizes the debts with the highest interest rates.

Choosing the Snowball Method vs. Avalanche Method

There is no right or wrong answer for which method to choose to pay down your debts. To choose the best method, consider the following:

• Financial goals: Are you looking to reduce the long-term cost of your debt, or address smaller debts first? Are you looking to eradicate your small debts first, or chip away at your largest debt?
• Motivation: Do you need a psychological boost and small wins when paying off your debt, or can you keep up your payments without extra motivation?
• Comfort: Are you comfortable with keeping a larger debt unpaid while you clear out smaller debts, or would you prefer to address the larger obligation first?
• Kind of debt: Do you carry a lot of high-interest debt, or are your debts smaller with lower interest rates?

Ultimately, both methods are effective at helping pay down debt, but you may be more comfortable with one method over the other. It can be helpful to talk to a financial professional to evaluate the method that aligns most closely with your goals.

 

 

For informational/educational purposes only. The information in this content is not advice on legal, tax, investment, accounting, regulatory, technology or other matters. You should always consult your own financial, legal, tax, accounting or similar advisors before making any financial or investment decisions, or entering into any agreement for Valley products or services.