When you’re deep in debt, the path to financial freedom can seem hopeless. You might question how to dig yourself out of debt when you can hardly cover your monthly bills. And what steps should you take to get started?
A debt repayment method can simplify the repayment process and give you the structure you need to stay focused. Two of the most popular debt repayment methods include: – The debt snowball method and the debt avalanche method.
Here’s everything you need to know about these repayment strategies so you can decide which one will help you pay your debts off faster.
What is the snowball debt method?
The debt snowball method is a repayment strategy made popular by American radio personality and author Dave Ramsey.
With the snowball debt repayment method, you focus on paying off your smallest debts first and then work up to your larger debts.
Like a snowball rolling down a hill, it starts small and then builds up momentum over time.
The goal of the snowball method is to start eliminating individual debts as fast as possible. This method is less focused on paying off your highest-interest debts first. By eliminating your smallest debts first, this can give you a quick win to keep you motivated.
For help determining which debts to pay off first and how long it will take to pay them off, you can use a debt snowball calculator.
How to use the snowball debt method
The debt snowball method is easy to use, follow these steps:
- List your debts. Make a comprehensive list of your debts, from smallest to largest. Don’t worry about interest rates.
- Make minimum payments. Make sure you make the minimum payment on each of your debts except your smallest debt.
- Pay off your smallest debt. Any extra money should go towards paying off your smallest debt until you eliminate it.
- Pay off your next-smallest debt. Once your smallest debt is paid off, move on to the second smallest debt.
- Repeat until your debts are gone. Once you’ve paid off your second-smallest debt, move to the third, and so on until all of your debt is gone.
Pros and cons of the debt snowball method
When choosing the debt repayment strategy that’s right for you, consider the benefits and challenges which include:
Pros:
- Paying off your smallest debt quickly can provide the motivation you need to keep going.
- There’s no need to calculate interest rates or do any math. Just list your debts from smallest to largest and get going.
- It works. PROOF
Cons:
- You may pay more. Since the debt snowball method doesn’t focus on paying off your highest-interest debts first, you may pay more over time than with the debt avalanche method.
Who should use the debt snowball method?
If you’re someone who struggles to stay motivated, the snowball method is likely a good fit for you. Because this method is focused on paying off your smallest debt first, you won’t have to wait as long for a win. Paying off your smallest debt can give you the motivation to keep going.
What is the debt avalanche method?
The debt avalanche method is more focused on the math. The goal is to pay off your highest-interest debt first so you can save more money over time. Unlike the debt snowball method, you’re not looking at the balance amount of each debt.
How to use the debt avalanche method
If you want to use the debt avalanche method, follow these steps:
- List your debts: Make a comprehensive list of your debts in order of highest to lowest interest rate.
- Make minimum payments: Keep making minimum payments on all debts except the one with the highest interest rate.
- Pay off your highest-interest debt: Put any extra money towards paying your highest-interest debt.
- Pay off debt with the second-highest interest: Once you’ve paid off your debt with the highest interest rate, move to the next one on your list.
- Repeat until your debts are gone: Keep going through your list from highest to lowest interest rate until you’ve eliminated your debts.
Pros and cons of the debt avalanche method
Here are some of the pros and cons to consider before you decide if the debt avalanche method is right for you:
Pros:
- Minimize interest payments. By tackling your highest-interest debt first, you can minimize the amount of interest you pay over time.
- Pay off debt faster. Since you’re paying less interest over time, you have more money to put towards your principal payments. This can help you pay off debt faster.
Cons:
- Harder to stay motivated. For some people, it’s harder to stay motivated with this method because it often takes longer to pay off your highest-interest debt.
Who should use the debt avalanche method?
If you are a highly motivated individual who is more interested in paying the least interest over time, the debt avalanche method might be the right fit. While this strategy can be harder to stick with, it makes the most mathematical sense.
Debt Snowball vs. Debt Avalanche: Which Strategy is Right For You?
The snowball debt method and the debt avalanche are two strategies that can help you stay focused on repayment and get out of debt. The strategy that’s right for you depends on your spending behaviours around money and your preferences.
However, if you have high-interest debts with large balances, the debt avalanche method can help you save more money over time and pay off your debts faster.
If you are dealing with smaller debts with similar interest rates, you might find the debt snowball method to be more motivating.
Need Debt Help? Speak to a Licensed Insolvency Trustee
If your debt feels unmanageable and strategies like the debt snowball or avalanche aren’t enough, reach out to a Licensed Insolvency Trustee (LIT). A LIT can assess your debt situation and recommend a path forward. Whether it’s simple counselling, a Consumer Proposal, or Bankruptcy, a LIT can recommend the widest range of debt help solutions. For a free, no-obligation consultation, call us at 1-888-371-8900, or complete our online contact form. We are here to help.
