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  • Alex Mizerski

Debt Avalanche vs. Debt Snowball: What's the Difference?


Debt Snowball vs Debt Avalanche
Debt Snowball vs Debt Avalanche


Debt snowball and debt avalanche are two popular methods for paying off multiple debts. While both methods can be effective, they each have their own pros and cons.


The debt snowball method involves paying off the smallest debt first, regardless of the interest rate. Once the smallest debt is paid off, the individual then moves on to the next smallest debt and so on. The idea behind this method is that paying off small debts first can provide a psychological boost and increase motivation to continue paying off debts.


The debt avalanche method, on the other hand, involves paying off the debt with the highest interest rate first, regardless of the balance. This method is based on the idea that paying off high-interest debt first will save the most money in the long run.


One of the main pros of the debt snowball method is that it can provide a sense of accomplishment and motivation as individuals see their debts being paid off one by one. Additionally, this method is simple and easy to understand, making it a good option for those who are new to debt management.


On the other hand, the debt avalanche method can save individuals more money in the long run as they will be paying off high-interest debt first which accrues more interest over time. Additionally, this method is also more logical and mathematically sound as it prioritizes paying off the most expensive debt first.


One of the cons of the debt snowball method is that it may not be the most financially efficient option as individuals may end up paying more in interest over time. On the other hand, the debt avalanche method can be overwhelming for some as it may take longer to see progress, and it can be harder to stay motivated.


Debt Snowball example:

Let's say you have the following debts:

  • Credit card 1: $2,000 at 15% interest

  • Credit card 2: $3,500 at 18% interest

  • Personal loan: $5,000 at 12% interest

Using the debt snowball method, you would start by paying as much as you can on the smallest debt (credit card 1) while making the minimum payments on the other two debts. Once credit card 1 is paid off, you would use the money you were previously using to pay off credit card 1 to pay off credit card 2. Then, once credit card 2 is paid off, you would use that money to pay off the personal loan.

Assuming you can pay $300 per month towards your debt, it would take you:

  • Credit card 1: 7 months to pay off

  • Credit card 2: 12 months to pay off (after credit card 1 is paid off)

  • Personal loan: 18 months to pay off (after credit card 2 is paid off)

Total time to pay off all debt: 37 months

Total interest paid: $1,947

Keep in mind that this is just an example and your own debt and interest rates may vary. Additionally, this method may not be the most efficient way to pay off debt considering the interest rate, it is important to consult with a financial advisor for personalized advice.


Debt Avalanche example:

Let's say you have the following debts:

  • Credit card 1: $2,000 at 15% interest

  • Credit card 2: $3,500 at 18% interest

  • Personal loan: $5,000 at 12% interest

Using the debt avalanche method, you would start by paying as much as you can on the debt with the highest interest rate (credit card 2) while making the minimum payments on the other two debts. Once credit card 2 is paid off, you would then focus on the debt with the next highest interest rate (credit card 1), and then finally on the personal loan.

Assuming you can pay $300 per month towards your debt, it would take you:

  • Credit card 2: 15 months to pay off

  • Credit card 1: 8 months to pay off (after credit card 2 is paid off)

  • Personal loan: 14 months to pay off (after credit card 1 is paid off)

Total time to pay off all debt: 37 months

Total interest paid: $1,743

Keep in mind that this is just an example and your own debt and interest rates may vary. Additionally, this method may not be the most efficient way to pay off debt considering the interest rate, it is important to consult with a financial advisor for personalized advice.


Ultimately, the choice between debt snowball and debt avalanche will depend on the individual's personal preferences and financial situation. Both methods can be effective, but it is important to weigh the pros and cons and choose the method that will work best for you.


Summary:


In summary, the debt snowball and debt avalanche are two methods for paying off multiple debts. The debt snowball method prioritizes paying off the smallest debt first, while the debt avalanche method prioritizes paying off the debt with the highest interest rate first. Both methods have their pros and cons, and the choice between them will depend on the individual's personal preferences and financial situation.

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