If you're looking to pay down debt, the first step is to come up with a plan for how to do so. While there are many strategies for paying down debt, two of the most popular are the snowball and the avalanche methods.
The snowball and avalanche methods both focus on paying off one debt at a time while continuing to make the minimum payments required on all other debts. Where they differ is the order in which they prioritize debts to be paid off.
Continue reading to learn how each of these debt payoff methods work. You can then decide which one is best for you.
Make a list of your debts. To get started with the snowball method, first make a list of all your debts. Put them in order of amount owed from lowest to highest without regard to interest rate. For example:
Credit Card A: $1,000
Auto Loan: $5,000
Credit Card B: $7,000
Student Loan: $13,000
Pay the minimum amount due on all debts. Once your debts are listed in order, you budget to make all the minimum payments on all debts. This is important because you want all your debts to remain in good standing to keep from harming your credit.
Put any extra funds toward the debt with the lowest balance. When you've satisfied all your minimum payment requirements, the snowball method has you take any extra funds available and put them toward paying down the debt with the lowest balance – in the example above, that would be Credit Card A.
Once one debt is paid off, move on to the next lowest balance. When you've successfully paid off the debt with the lowest balance, following the snowball method, you would make the minimum payment on all debts, and then take the payment from the lowest balance debt (in this example, Credit Card A) plus any extra cash and put it toward the debt with the next lowest balance (in this example, Auto Loan).
Continue until all debts are paid off. You then continue this pattern until all your debts are paid off.
The snowball method works well for individuals who need quicker "wins" to stay motivated to pay down their debt. Because you're focused on paying down the lowest balance debt first, you'll typically eliminate a bill faster than you will with the avalanche method, which is the encouragement some individuals need to stay focused on their debt payoff goals.
One con of the snowball method, however, is that it inherently ignores interest rates. This means that you could end up paying more in interest over time if the lowest balance debt doesn't also have the highest interest rate.
Make a list of your debts. To get started with the avalanche method, first make a list of all your debts. Put them in order of interest rate, from highest to lowest, without regard to the amount you owe. For example:
Credit Card B: 22%
Credit Card A: 18%
Student Loan: 6%
Auto Loan: 3.5%
Pay the minimum amount due on all debts. Just as with the snowball method, once your debts are listed in order of interest rate, you budget to make all the minimum payments on all debts. This is important because you want all your debts to remain in good standing to keep from harming your credit.
Put any extra funds toward the debt with the highest interest rate. When you've satisfied all your minimum payment requirements, the avalanche method has you take any extra funds available and put them toward paying down the debt with the highest interest rate – in the example above that would be Credit Card B.
Once one debt is paid off, move on to the next highest interest rate. When you've successfully paid off the debt with the highest interest rate, following the avalanche method, you would make the minimum payment on all debts, and then take the payment from the highest interest rate (in this example, Credit Card B) plus any extra cash and put it toward the debt with the next highest interest rate (in this example, Credit Card A).
Continue until all debts are paid off. You then continue this pattern until all your debts are paid off.
The biggest perk of the avalanche method is that you'll pay the least in interest over time. This is because you're knocking out the debt with the highest interest rate first, leaving less time for interest to accrue on the balance.
The one drawback of the avalanche method is that because you're not paying attention to the amount of the debt, it may take longer to pay off individual debts, which can be discouraging for some individuals.
So, what's the better choice for you? The snowball method? Or the avalanche method?
In the end, it comes down to personal preference and your individual circumstances. The best debt payoff strategy is one that you can stick to and that makes you feel empowered and comfortable with your finances.
As you're focused on paying down debt, you'll want to consider other actions, as well, like refinancing home or auto loans that don't carry competitive rates or transferring high-interest credit card debt to a credit card with a lower rate. Both actions can help you save even more in interest charges over time.
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