Hey budgeting people,
When I began budgeting and thinking about paying off debt (Because that is productive) there were only two most popular way to paying off debt. The debt snowball and the debt avalanche.
The snowball focuses on the actual payment owed whereas the avalanche focuses on the interest rate.
To start, you must list all your debts that you have; along with interest rate, ordering them by highest interest rate to lowest interest rate.
Then you pay all your minimums every month, putting all extra money you can, to pay off your highest interest rate debt first as quickly as possible.
Then when that debt is out the way, you continue paying all the minimums, taking the previous debts minimum payment and rolling it into the second highest interest rates minimum payment.
You continue onto the next debt. And the next debt and the next debt, until you have none left.
The table demonstrates how to order it and how the payment rolls down.
|Amount owed||Minimum payment||Interest rate||Extra payment||Total payment|
The debt avalanche is amazing for a number of reason
- It usually saves you money in interest payments.
Paying less for your debt, and saving money on your debt, is beneficial as you owe less in the end. As the interest doesn’t have time to accumulate, as you are paying it off quickly, you get to pay less than you would using the snowball.
- Most of the time, it reduces how long you are in debt for.
This is because there is less interest compounding (yes, it works both ways). So, you will potentially shave time off your debt free journey compared to the snowball. Being debt free quicker, is the dream.
The disadvantages of the debt avalanche
- You may not get “easy wins” if your high interest rate debt is high.
When you first are getting into budgeting and paying down debt, you may not be prepared for how long it takes get initial results. Which is why sometimes people merge the two systems.
- You may have more debts outstanding longer than with the debt snowball.
You may also, get stuck with lots of pesky little debts which are just lying around, instead of paying them off, like you would in the snowball just because they are not high interest.
Personally, the debt avalanche doesn’t work for my debt situation, as the benefits are minimal. When I ran the numbers, I only saved two months and not a lot of cash.
If I had more than one high interest debt, and no zero percent debts, I would have used the avalanche instead.
However, if you have multiple high interest rate debts, that you cannot get changed to lower ones, I would consider using this method to save both time and money.
Studies have shown that regardless of the debt repayment plan you chose, if you are focusing on paying on one account at a time, you are likely to be successful. Rather than splitting your focus between the accounts.
If your goal is to pay off debt, then picking a method that best suits you, your mentality and the way that suits your personality and to stick to it is the only way to do it.
If you need easy wins, the debt avalanche is not for you. If you need to have less things taking up your thoughts, then also not for you.
However, if you are patient, and willing to wait to see results, the debt avalanche is an amazing system.
Both methods require a huge amount commitment, determinations, and self-restraint. So, if you are looking for an easy way to pay off debt, these are not it.
Let me know what you think.
Would you use this plan?
Why / why not? Which plan do you prefer?
And which one did you use/ are still using?