When it comes to managing and clearing debt, two popular methods stand out: the Debt Avalanche and the Debt Snowball methods. Both aim to help individuals systematically eliminate their debts, but they use different strategies. Understanding the differences can help you select the one that's right for your financial situation.
What is the Debt Snowball Method?
The Debt Snowball method, popularized by finance guru Dave Ramsey, advocates for paying off your smallest debts first, irrespective of the interest rate. This approach gives you quick wins, as you're able to clear smaller debts faster. These small victories provide a psychological boost that can motivate you to stick with your debt repayment plan.
For example, suppose you have three debts: $500 at 5% interest, $1000 at 10% interest, and $2000 at 15% interest. Using the snowball method, you would prioritize the $500 debt, then the $1000, and finally the $2000 debt.
What is the Debt Avalanche Method?
Alternatively, the Debt Avalanche method focuses on paying off debts with the highest interest rates first. This strategy saves more money over time by tackling the most expensive debts first. It might take longer for you to witness the progress, but the overall interest you'll pay in the long run will be lower.
Using the same debts example from above, the avalanche method would have you pay off the $2000 debt with 15% interest first, then the $1000 debt at 10%, and finally the $500 debt with 5% interest.
Which Method Should You Choose?
Choosing between the Snowball and Avalanche methods largely depends on your financial goals and circumstances and your personal preference. If you're motivated by quick wins and need to see progress to stay motivated, the Snowball method might be best for you. This method is also helpful if you have a lot of small debts and you feel overwhelmed.
On the other hand, if you're more focused on the total amount you'll pay over time, the Avalanche method may be more appealing. This method is ideal for those with larger debts with high-interest rates.
You may also choose to combine both methods, using the Snowball method to clear smaller debts and build momentum, then switch to the Avalanche method for larger, high-interest debts.
Debt reduction is not a one-size-fits-all process. It's essential to choose a method that aligns with your financial goals and that you can stick with in the long term. One of the best ways to reach your debt goals is to use process and set of tools that keeps you committed to these goals. Otto is an AI-powered debt advisor that does just that! Get started with Otto to determine the best debt management method for you and take control of your debt today.