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Debt Management

Snowball and Avalanche: Two Strategies to Pay Down Debt


Paying off debt is not an easy thing to do. It requires financial discipline, strategic planning, and consistency. However, there are some simple strategies you can leverage to tackle your debt head-on: the Avalanche and the Snowball.

Before we begin, it’s important to remember two things. First, no single strategy is superior to the other; they both have their strengths and weaknesses. Second, while these strategies apply to student loans, credit card balances, auto loans, and most consumer debts, they generally do not apply to mortgage debt.

Let’s get started!

What is the Snowball Strategy?

According to the Snowball loan repayment strategy, borrowers make the minimum payment on all their debts except the smallest, attacking the smallest overall debt first by paying as much as possible towards it until it is paid off in full. You continue making minimum payments on all other debts while working to pay the smallest debt off.

Once paid off, you take the money you were spending on that recently paid debt and apply it to the next-smallest debt. You continue making the minimum payments on all other debts as you chip away at each one in sequence. This is effective for many borrowers because you make real progress (a huge psychological boost) and avoid slipping further behind.

The first step to utilizing the Snowball strategy is to list all your debts, starting with the smallest and ending at the biggest. The Snowball debt repayment strategy is a practical, behavioral approach to debt repayment. Using this method is all about changing behavior and applying new, disciplined habits to debt repayment.

The best part? You don’t need a degree in finance or accounting to pull this off – you can do it with a simple list and a promise to yourself.

Snowball Strategy Illustration

Let’s assume you have $3,000 to devote every month to your debt obligations, and you owe the following amounts:

  1. $15,000 credit card debt at a 20% annual interest rate.
  2. $25,000 student loans at a 5% monthly interest rate.
  3. $5,000 car loan at a 2.5% interest rate.

The Snowball strategy recommends eliminating the car loan within two months and then moving to the credit card debt. With this strategy, you could be debt-free in under two years. But watch out: one major disadvantage of the Snowball strategy is that interest accumulates on the bigger loans as you tackle the smaller ones.

What is the Avalanche Strategy?

The Avalanche debt repayment strategy stipulates an interest-rate approach to debt repayment. It involves making a minimum payment on all outstanding accounts while paying off the debt with the highest interest rate first by paying as much as possible towards that debt. After this debt is paid off, the next one you pay off is the debt with the next-highest interest rate. In contrast with the Snowball strategy, the end goal of the Avalanche strategy is to take out the loans with the highest interest rates first regardless of size.

Avalanche Strategy Illustration

Let’s assume you have the same $3,000 earmarked every month for payment toward all outstanding debts:

  1. $15,000 credit card debt at a 20% annual interest rate.
  2. $25,000 student loans at a 5% monthly interest rate.
  3. $5,000 car loan at a 2.5% interest rate.

Using the Avalanche strategy, you will have to pay the credit card debt first and then move to the student loan debt before becoming debt-free after paying the third loan. One of the advantages of this strategy is that less interest accumulates.

The Avalanche strategy takes considerable courage to stick with because you may have to make a lot of cutbacks to your discretionary spending as you struggle to climb the mountain rather than the anthill.

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