Best Snowballs Vs. Best Avalanche: better approach for debt payoff?
You’re up for loan repayment, fine! Now, to assess which tool you can use. A best snowballs of debt or an iceberg of debt? We address the discrepancy between the two here and provide you with a tool to determine which approach is better for you.
So, you’re tired of being in debt, and a debt elimination strategy is about to be put together. Terrific!
You may have learned of the best snowballs debt, and the debt avalanche is a close, but distinct buddy.
Both two strategies are nearly precisely the same except that, with the exception of one concentrate debt, they both require you to make minimal fees on all your debts.
You can give each additional dollar you will find for either strategy before the concentrate debt is paid off. When it is, the next debt in line becomes the new target debt for you. When you pay down your loans and the minimum payments go down, you will have to give more and more money to the debt you are focusing on as extra payments (hence the snowball analogy).
The only difference between the best snowballs and the landslide is that your loans will be paid off. Some authors in personal finance zealously claim that one is better than another; we think it’s a matter of personal choice (as long as the debt goes down!)
The method of the best snowballs debt
In the best snowballs debt process, you pay down your loans, regardless of interest rates, from the smallest balance to the highest balance.
The reasoning for this is that persons frequently have a lot of minor loans floating around. Every month, tons of statements come. Lots of minimum payments to pay and it’s getting big. Doctor’s bills from many different states, minor balances on store credit cards here and there, or money lent from family members.
It all all seems daunting because it looks like you owe more money everywhere you move.
You start to clear the little debts out very easily as you pay down your debts from the smallest to highest balance. You could also get rid of the whole loan every month for the first few months, depending on the case.
That really sounds inspiring. You soon see results and you start feeling like you should actually do this. Then you have the confidence, skill, and surplus cash flow to make it to the end by the time you start handling the bigger debts, like the car loan or the big credit card balance.
The process of the debt avalanche
You pay the debts from the highest interest rate to the lowest interest rate, regardless of balance, in the debt avalanche process.
This makes the most sense, mathematically. When you handle your loans in this order, you will pay less in interest. Saving money on interest means that you can pay off your loans sooner. Isn’t getting out of debt the whole point of doing so as soon as possible?
When you tackle the highest interest rate first, you get the best bang for the buck. When you have a credit card that costs 18%, why pay for a loan that does not incur any interest?
The secret that no one speaks about best snowballs vs. best avalanche
Some people have zealous views on which methodology is best. Hell bent on the best snowballs debt, the Dave Ramsey crowd has a cult-like follow-up. The avalanche party learns of all the math laws and can’t understand that not everyone does things that way.
But the key is here… it hardly matters!
The easiest way to pay off debt is to make minimum contributions with the exception of one focus debt on all your debts. Hone in on one debt, and once it’s gone, send every dollar you can against that debt. It makes very little difference a debt you choose! Don’t you like me? Let’s get the math done.
Let’s take Joe and Suzie, a husband and wife with the following debts:
Together, they agreed they should spend $1,000 a month, plus all minimum contributions, for loan payments. Using the avalanche strategy, Joe needs to pay off their loans, first with the highest interest rate. Yet Suzie needs to use the best snowballs of debt to first pay the lowest balance.
- After five years and four months, the two will be debt-free using Joe’s avalanche. They’ll pocket 8,394 dollars in interest.
- Using Suzie’s snowball, after five years and five months, the pair will be debt free. They’re going to cost 9,378 dollars in interest.
One month and $985 for five years is the difference.
Today, a decent chunk of capital is $985. So there’s just a $15.15 gap of interest per month doing things the way of the snowball vs. the landslide. The point is, fighting over is not worth fighting over. Choose the debt that worries you the most, I suggest, and fix it. Then move on to the next debt that most disturbs you and so on.
The snowball and avalanche strategies are virtually similar except that you can pay off your debt easily (depending on how much debt you have). It is more important to remain focused than a few extra dollars in interest you can save with the avalanche process. Since giving up on your dream or falling back into debt is the worse scenario.
Want to try that out for figures of your own? Here you can download a debt snowball calculator that will allow the snowball, avalanche, and a custom order to be compared.