Debt Snowball vs. Debt Avalanche
If you are looking to get out of debt as quickly as possible, you have two major strategies to choose from if you are looking for a general plan. The Debt Snowball involves paying down the smallest accounts on your books while the Debt Avalanche involves paying down accounts with large interest rates first. Here we will look at the advantages and disadvantages of each and also tell you when a completely different strategy is advisable.
Advantages of the Debt Snowball
This payoff technique is a great way to keep yourself in the game psychologically as well as financially. If you focus on playing down the smallest accounts first, you will be able to quickly get rid of some of your bills such as credit card debt. However, larger debts such as student loans will remain on your books for a long time accumulating interest.
If you have a steady source of income that you feel will remain steady for the next few years, you should be focusing on reducing the total amount of creditors on your books. You may be able to afford the organizational advantages that the debt snowball provides you are the expense of leaving bigger accounts alone. It is a Great way to keep from missing bills and being charged late fees and penalties from overlooking a mailing or missing a digital alert.
Advantages of the Debt Avalanche
The avalanche is a great way to pay down your debts if you are looking to get rid of large accounts such as your student loans first. This can be a great way for people to keep their head in the game by reducing the total amount of debt quickly. The Avalanche is a great way to proceed for people who do not have a large number of creditors, rather, they have sizable debt interspersed between a small number of creditors.
The Avalanche is great for reducing the amount of time that you are paying down debt. If you are not sure that you will have the same source of income in five years, then this may be the strategy for. It pays down interest more quickly so that you can free yourself to open up new avenues of income without having to worry about incurring late fees and penalties.
Advantages of Other Strategies (Debt Consolidation)
Both of the above strategies are ways to organize your debt if you have multiple creditors. However, it may be advisable to simply consolidate your debts into a single creditor so that you do not have to live by your debt payoff planner.
Debt consolidation may be an option if you are looking at a default at one or more of your debtor accounts. If you have a large amount of credit card debt or other unsecured debt that is in danger of ruining your long-term finances, you may want to adjust your debt payoff planner to include this strategy.
Most debt consolidation is only available for people who are in more serious financial trouble. For instance, many consolidation firms have a minimum of $10,000 that you must be in debt before they will qualify you for their program. Consolidation also ends up costing more than either of the previous two strategies; however, you will receive the best deal on your monthly payments.
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Our team is dedicated to providing up-to-date financial information to help people manage their debt. Our goal is to improve mindset, reduce guilt, and deliver actionable information. We are not financial professionals and the information we've provide should not be considered official advice.