Finance & Career
Reducing debt can seem like an overwhelming task for many people. However, if people are ready to tackle their debt head on, there are two debt reduction methods that can be useful; the snowball method and the avalanche method. Both of these methods are helpful strategies with measurable results. The ultimate benefit is one of personal preference, but both methods consist of pros and cons. People should evaluate these and determine which method works best for them.
Both methods start with a listing of debts and their regular payment amounts. With both methods people continue to make those minimum payments on time for each debt with the exception of one. This is where the two methods differ.
The Snowball Method
The snowball method starts with listing all debts and their payment amounts. Minimum payments should continue to be made on time for all debts except one. That one exception is the debt with the lowest balance. Extra money will go toward that debt. Once that debt is paid down to a zero balance, the same strategy is used on the next debt with the lowest balance.
However, this is where a twist comes into play. At this point, take the extra money from the debt that was just paid off and add that amount to the payments of the next lowest debt on the list. This increases the monthly payments to that debt and will ultimately decrease that debt at a faster rate. This process continues until all debts have been paid in full.
The snowball method provides a more instant gratification. By starting with the smaller debts, there is a quicker reward offered in seeing a reduction in total debt and individual accounts. For those needing that constant, easily visible reminder as motivation, the snowball method is the method of choice.
The Avalanche Method
With the avalanche method, the starting point is once again listing all debt. Minimum payments to each debt continue with the exception of one. This time that one exception is the payment for the debt with the highest interest rate. Any extra money will go toward this debt’s payment. While this extra money decreases the total amount of debt, it also shortens the time of that debt accruing interest. As each debt is paid off, the payment for that debt along with any other extra money moves to the next debt with the next highest interest rate.
As the debts are paid off, with the avalanche method, the overall total amount of interest also decreases. This means in the end the amount of interest paid on debt is lower than originally anticipated when the debt was incurred. This method does potentially produce a greater savings. However, that positive feedback isn’t noticeable as early in the process as with the snowball method.
Either method will produce the desired outcome of reducing debt and reaching that place of financial freedom. The best option is simply a personal preference. Paying off debt is a tedious task that requires commitment. If constant motivation is needed to maintain a commitment to the process, the snowball method would be the best choice. On the other hand, if people have the ability to hold out for the end result, they may opt for the avalanche method. There are several online resources available, such as PowerPay.org, that can help people determine when they could reach their goal and the interest amounts they would pay or possibly save.
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