What is Snowball vs Avalanche?
Snowball
The snowball method is a strategy to paying off debt. The strategy includes paying off the smallest debts first, providing an immediate sense of accomplishment. Many people favor this method since it makes it psychologically easier to stick to a plan, build momentum, and pay off debt altogether. This method does not take into account interest rates.
Avalanche
The Avalanche Method is another strategy to paying off debt. The strategy includes paying off the debt with the highest interest rates, which ends up saving the most amount of money. However, this method requires discipline and knowledge of interest rates as well as debt balances.
This post is about snowball vs avalanche debt paying methods.
What are the 5 benefits to the Snowball Method?
1. Quicker Results
The Snowball Method targets smaller debts first, this can help you visualize paying off the debts quicker.
2. Immediate Sense of Accomplishment
By getting rid of smaller debts first, it’s like crossing an item off your to-do list: it provides a sense of accomplishment.
3. Easier to Stick to
Since the Snowball Method provides a sense of accomplishment, it’s providing instant gratification. Therefore, making it easier to stick to the debt pay off journey.
4. Building Momentum
As you’re paying off more debts, it’ll provide an immediate sense of accomplishment. This makes it easier to keep the motivation going, when you can visually see the progress. This can turn into encouragement to continue the journey.
5. More Flexible
The Snowball Method allows more flexibility since it focuses on the smallest debts first. When you begin the journey, you’ll likely carve out an amount within your budget to paying off debt. As you continue paying off debt, you’ll be more acquainted with consistently setting aside money to debt. After you’ve gotten used to this, you can set aside more money to paying off the bigger, higher interest rate debt. Once you’ve completed paying off your debts, you’ll already be used to setting a certain amount of money aside in your budget. Instead of going towards debt, this can go towards savings now!
What are the 5 benefits of the Avalanche Method?
1. Saves the Most Amount of Money
The Avalanche Method targets the debts with the highest interest rates. The more time the high interest rate debt is allowed, the more interest it will accrue. By paying off those debts, this doesn’t allow the debts with the highest interest rates to accrue even more debt; therefore, saving you the most amount of money in the long run.
2. Reduce Amount of Interest Paid
On the same vain as tip #1, by paying off the debt with the highest interest rates first, this prevents the interest from accruing further. Therefore, reducing the total amount of interest paid. Your dollar goes further with this method.
3. Maximize Debt Repayment Amount
Since the Avalanche Method focuses on paying off debts with the highest interest rates first, this results in reducing the total amount of interest paid. Therefore, reducing the total amount of debt you’re paying. This ultimately optimizes the amount you’re putting towards your debt!
4. Reduce Debt Faster
Paying off the highest interest rate debts first means tackling your debt in the most optimal manner. Once you get into the groove of paying off the highest interest rate debt first, you’ll end up chucking away at your debt much faster than if you were to go the Snowball route (slow and steady).
5. Develop Better Financial Habits
When paying off debt, you’ll be sectioning off a chunk of your budget and allocating it towards debt. Once you’ve paid off all your loans, you’ve created the habit of allocating a certain amount of your budget on something. Instead of putting it towards debt, you can now put it towards saving, investing, or some other way to build wealth! Therefore, paying off debt using the Avalanche Method helps to develop better financial habits!
What are the 4 cons to the Snowball Method?
1. More Costly
this method could cost more in the long term, as it focuses on the amount of the loan, not necessarily the interest rate. It depends on the interest rates of your debts.
2. Higher Interest Debt
Since the Snowball Method targets the amount of the smallest loan first, it could mean putting a loan with higher interest rates on the backburner. Therefore, accruing more interest on said debt.
3. Difficult to Prioritize Which Debts to Pay Off First
Since the Snowball Method focuses on the smallest amount of debts first, this may not be the most optimal in getting the most bang for your buck. Making it difficult to prioritize which debts to pay off first.
4. Doesn’t Optimize Total Debt Repayment Amount
This doesn’t necessarily optimize your debt pay off journey. Companies/banks make money on debt based on the interest rate. The higher the interest rate, the more money they’re making. By prioritizing based on the loan amount and not the interest rate, you could very well end up paying more for your loans; therefore, the Snowball Method doesn’t optimize the total debt repayment amount.
5. Takes Longer to Pay Off Debt
Since the Snowball Method prioritizes paying smaller debts first, this puts high-interest debts on the backburner. Therefore, potentially accruing more interest, adding to the overall cost of debt. Making it longer to pay off larger debts in the end.
What are the 5 cons to the Avalanche Method?
1. Takes Longer to See Results
Since the Avalanche Method focuses on debts with the highest interest rates first, it can be quite challenging to stay motivated. It may be discouraging when it seems like there isn’t very much progress because you’re not necessarily knocking out the debt in its entirety. It could seem as though you’re slowly chipping away at it, without making a dent.
2. Difficult to Stay Motivated
On the same note, because it may seem as though you’re slowly chipping away at it, it could be challenging to stay motivated during the process. Quite frankly, it could be discouraging.
3. Complicated to Set Up
This method requires an understanding of the debt balances, interest rates, and other terms revolving each of the debts. Hence, it could be seen as being complicated to set up.
4. Requires Knowledge of Interest Rates and Debt Balances
Again, it requires not only fundamental knowledge of the debt balances and interest rates, it requires an understanding of your personal debt balances and interest rates assigned to each debt.
5. Requires Discipline
Because it takes longer to see progress, this method requires discipline.
The Snowball vs Avalanche. So…which is better?
Both and neither. Huh?
Paying off debt is a deeply personal journey. It depends on your situation, what works best for you, how much debt it is, and how long you have to pay it/them off.
If you’re someone who enjoys instant gratification, has flexibility in how long you have to pay off your debt, the snowball method might be more suited.
If you’re someone who’s very disciplined, wants to optimize your debt pay off journey, the avalanche method might be more suited.
