Debt Repayment Strategies: The Debt Avalanche Method and the Debt Snowball Method | INVESTED MOM
If you're like many people, you may have found yourself with a significant amount of consumer debt, whether it be from credit cards, personal loans, or other sources.
According to a report from the Federal Reserve, the average American household had $137,063 in debt in the fourth quarter of 2020, with credit card debt being one of the largest contributors to this total. (Federal Reserve, Household Debt and Credit Report, 2020 Q4)
The good news is that there are several strategies you can use to pay off your debt and become debt-free. In this blog post, we'll look at two popular debt repayment strategies:
The debt avalanche method
The debt snowball method
Each method has an impact on your personal finances, behaviors, and emotions. The debt avalanche method encourages you to focus on the most financially sound strategy and can help you save money in the long run, but may take longer to see progress and feel motivated.
The debt snowball method provides quick wins and a sense of progress but may take longer to pay off your debt and cost more in terms of interest.
Ultimately, the best strategy for you will depend on your individual circumstances, goals, and priorities. Let’s dive in!
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The Debt Avalanche Method
The debt avalanche method is a strategy that prioritizes paying off your debts based on the interest rate. You start by paying off the debt with the highest interest rate first, and then move on to the debt with the next highest interest rate, and so on until all of your debt is paid off.
This method can help you save money on interest over time and get out of debt faster.
For example, let's say you have four credit cards with the following balances and interest rates:
Card 1: $5,000 balance, 15% interest rate
Card 2: $3,000 balance, 20% interest rate
Card 3: $4,000 balance, 10% interest rate
Card 4: $2,000 balance, 25% interest rate
Using the debt avalanche method, you would prioritize paying off Card 4 first, as it has the highest interest rate of 25%.
You would make the minimum payments on the other three cards while focusing all of your extra money on paying off Card 4.
Once Card 4 is paid off, you would move on to Card 2, which has the next highest interest rate of 20%.
You would continue making the minimum payments on the other two cards while focusing your extra money on paying off Card 2.
You would keep following this process until all of your credit card debt is paid off.
Benefits of the Debt Avalanche Method:
Minimizes the amount of interest you pay over time, which can help you get out of debt faster.
Helps you save money in the long run by prioritizing the debts with the highest interest rates.
Encourages you to focus on the debts that are the most expensive in terms of interest, which can be a more financially sound strategy.
Drawbacks of the Debt Avalanche Method:
May take longer to see progress and feel motivated, as you're focusing on paying off the debts with the highest interest rates first.
Can be less emotionally satisfying than the debt snowball method, as you're not seeing quick wins.
May require more discipline and patience to stick to the plan, as the process can feel slow and uneventful.
How do you choose which debt repayment option is right for you?
What if you like aspect of both, but you’re not sure which one is exactly right for you? Keep reading, I’ve got some guidance for you.
"Debt is like any other trap, easy enough to get into, but hard enough to get out of." - Josh Billings
The debt avalanche method is most appropriate when:
Your main priority is to save money on interest over time and get out of debt as quickly as possible.
You have a high amount of debt with multiple credit cards or loans and high-interest rates.
You have the discipline and patience to stick to the plan and prioritize paying off the debts with the highest interest rates first, even if it takes longer to see progress.
The debt snowball method is most appropriate when:
You need quick wins and a sense of progress to stay motivated and on track.
You have a smaller amount of debt with multiple credit cards or loans and lower interest rates.
You are more focused on paying off debts one by one rather than optimizing for the total interest paid.
It's important to note that these are general guidelines and the best strategy for you will depend on your individual circumstances, goals, and priorities. You may also find that a combination of the debt avalanche and debt snowball methods works best for you, depending on the specifics of your debt and financial situation.
The Debt Blizzard Method
Yes, I made that up. I’m coining it. The combination option of using both the debt snowball method and the debt avalanche method does not have a specific name, but it’s an option.
It's simply a custom approach that combines elements of both strategies to suit the individual's needs and goals. You could refer to it as a "hybrid" or "customized" debt repayment plan.
The important thing is to find the approach that works best for you and your circumstances, regardless of what it's called.
Here's an example of how the debt blizzard method might work:
Imagine Jane has four credit cards with the following balances and interest rates:
Card 1: $5,000 balance, 15% interest rate
Card 2: $3,000 balance, 20% interest rate
Card 3: $4,000 balance, 10% interest rate
Card 4: $2,000 balance, 25% interest rate
To use a combination approach, Jane could start by using the debt snowball method to pay off Card 4, the card with the smallest balance. This will give her a quick win and a sense of progress, which can be motivating.
Once Card 4 is paid off, she could switch to the debt avalanche method and prioritize paying off Card 2, the card with the next highest interest rate of 20%. This will help her save money on interest over time and get out of debt faster.
She could continue using this combination approach, alternating between the debt snowball and debt avalanche methods as needed, until all of her credit card debt is paid off.
This approach combines the benefits of both the debt snowball and debt avalanche methods, giving Jane quick wins to stay motivated while also saving her money on interest over time.
Debt-Busting Blueprint: A Step-by-Step Guide
Step 1: Assess your debt
The first step in developing a debt repayment plan is to assess your current financial situation and understand exactly how much debt you have, what the interest rates are, and who the creditors are. Make a list of all of your debts, including credit card balances, personal loans, and any other outstanding debts.
Step 2: Prioritize your debts
Once you have a complete picture of your debt, it's time to prioritize your debts. You can choose to prioritize your debts based on interest rate (the debt avalanche method) or balance (the debt snowball method).
If you choose the debt avalanche method, you'll start by paying off the debt with the highest interest rate first. If you choose the debt snowball method, you'll start by paying off the debt with the smallest balance first.
Step 3: Create a budget
The next step is to create a budget to see exactly how much money you have available to put towards paying off your debts each month. This will help you determine how much you can realistically afford to pay towards your debts each month.
Step 4: Make a plan
With your debt prioritized and your budget in place, it's time to make a plan. Decide how much you will pay towards each debt each month, and make sure to allocate enough money towards each debt to meet the minimum payment.
Step 5: Automate your payments
To make the process of paying off your debt as easy as possible, consider automating your payments. This way, you won't have to worry about forgetting to make a payment or accidentally spending the money that you had set aside for debt repayment.
Step 6: Track your progress
Keep track of your progress as you work towards becoming debt-free. This will help you stay motivated and see how far you've come. You can use a spreadsheet, a budgeting app, or even a simple notebook to track your progress.
Step 7: Adjust as needed
As you work towards becoming debt-free, your financial situation may change. Maybe you receive a raise or incur unexpected expenses. Be flexible and adjust your plan as needed to make sure that you're staying on track.
Step 8: Celebrate your successes
Finally, make sure to celebrate your successes along the way. Whether it's paying off a smaller debt or making a significant dent in your overall debt, it's important to acknowledge and celebrate your progress. This will help you stay motivated and focused on your ultimate goal of becoming debt-free.
Moving forward
Both the debt avalanche method and the debt snowball method can help you get out of debt and become debt-free. The debt avalanche method can help you save money on interest over time and get out of debt faster, while the debt snowball method can help you see progress more quickly and be motivated to keep paying off your debt. The debt blizzard method combines the benefits of both the debt snowball and debt avalanche methods - the best of both.
Your ideal strategy will depend on your individual circumstances, so it’s important to consider your own goals, resources, and priorities when choosing a debt repayment strategy.
Regardless of which strategy you choose, the key to success is sticking to your plan and making consistent, additional payments towards your debt each month. This can help you pay off your debt more quickly and minimize the amount of interest you pay over time.
HOT TIP: It's also important to look for ways to reduce your spending and increase your income, so you have more money to put toward your debt. This could involve cutting back on non-essential expenses, finding ways to earn extra money, or negotiating with your creditors for lower interest rates or more favorable terms.
Debt Repayment Strategies: The Debt Avalanche Method and the Debt Snowball Method FAQ:
Q: What are the debt avalanche method and the debt snowball method?
A: The debt avalanche method is a strategy that prioritizes paying off your debts based on the interest rate. You start by paying off the debt with the highest interest rate first and then move on to the debt with the next highest interest rate, and so on until all of your debt is paid off. The debt snowball method is a strategy that prioritizes paying off your debts based on the balance. You start by paying off the debt with the smallest balance first, regardless of the interest rate, and then move on to the debt with the next smallest balance, and so on until all of your debt is paid off.
Q: What are the benefits of the debt avalanche method?
A: The debt avalanche method can help you save money on interest over time and get out of debt faster. By prioritizing the debts with the highest interest rates, you minimize the amount of interest you pay, which can help you get out of debt more quickly.
Q: What are the benefits of the debt snowball method?
A: The debt snowball method can help you see progress more quickly and be motivated to keep paying off your debt. By paying off the smallest balances first, you can quickly see the results of your efforts, which can be motivating and help you stay on track.
Q: How do I choose between the debt avalanche method and the debt snowball method?
A: The best strategy for you will depend on your individual circumstances and goals. If saving money on interest and getting out of debt as quickly as possible is your main priority, the debt avalanche method may be the better choice. If you need a quick win to stay motivated, the debt snowball method may be the way to go.
Q: What should I do in addition to using a debt repayment strategy?
A: In addition to using a debt repayment strategy, it's important to look for ways to reduce your spending and increase your income. This could involve cutting back on non-essential expenses, finding ways to earn extra money, or negotiating with your creditors for lower interest rates or more favorable terms. Additionally, making consistent, additional payments towards your debt each month can help you pay off your debt more quickly and minimize the amount of interest you pay over time.
Q: How long does it take to become debt-free using a debt repayment strategy?
A: The amount of time it takes to become debt-free using a debt repayment strategy will depend on several factors, including the amount of debt you have, your monthly payments, and the interest rates on your debts. However, with the right strategy and a commitment to paying off your debt, you can reach your goal and become debt-free.
Q: Can I use both the debt avalanche method and the debt snowball method at the same time?
A: Yes, you can use a combination of both the debt avalanche method and the debt snowball method, which is sometimes referred to as the "debt blizzard method". This approach involves using elements of both strategies to suit your individual needs and goals. For example, you could start by using the debt snowball method to pay off the debt with the smallest balance and then switch to the debt avalanche method to prioritize paying off the debt with the highest interest rate.
Q: How do I get started with a debt repayment strategy?
A: To get started with a debt repayment strategy, you should first create a budget to understand your income and expenses. Then, make a list of all your debts, including the balance, interest rate, and minimum payment. From there, you can decide which debt repayment strategy works best for you, and start making extra payments toward your debt each month.
Q: Is it better to pay off smaller debts first or larger debts first?
A: Whether it's better to pay off smaller debts first or larger debts first depends on your individual circumstances and goals. If your main priority is to save money on interest over time and get out of debt as quickly as possible, the debt avalanche method is a better choice, as it prioritizes paying off the debts with the highest interest rates first. If you need quick wins to stay motivated, the debt snowball method is a good choice, as it prioritizes paying off the debts with the smallest balances first.
Q: Can I negotiate with my creditors for lower interest rates or more favorable terms?
A: Yes, you can negotiate with your creditors for lower interest rates or more favorable terms. Contact your creditors and explain your financial situation, and ask if they can lower your interest rate or offer more favorable terms. This can help you save money on interest and make it easier to pay off your debt.
Q: How can I increase my income to pay off my debt faster?
A: To increase your income and pay off your debt faster, you can look for ways to earn extra money, such as taking on a side job, starting a business, or selling items you no longer need. You can also look for ways to reduce your spending, such as cutting back on non-essential expenses and putting the extra money toward your debt.
Q: Can I use a debt repayment strategy to pay off student loan debt?
A: Yes, you can use a debt repayment strategy to pay off student loan debt. The same principles apply, whether you have credit card debt, personal loan debt, or student loan debt. You should prioritize paying off the debt with the highest interest rate first if using the debt avalanche method or prioritize paying off the debt with the smallest balance first if using the debt snowball method.
Q: How long does it take to become debt-free using a debt repayment strategy?
A: The amount of time it takes to become debt-free using a debt repayment strategy will depend on several factors, including the amount of debt you have, your monthly payments, and the interest rates on your debts. However, with the right strategy and a commitment to paying off your debt, you can reach your goal and become debt-free.
Remember, becoming debt-free is a journey, and it may take time, discipline, and patience. But with the right strategy and a commitment to paying off your debt, you can reach your goal and enjoy financial freedom.
If you want to start paying off your debt but don’t know where to start, join the Wealth Builders Academy and get everything you need to knock out your debt.