When Repaying Debt, Avalanche Beats Snowball

There are two schools of thought on how to pay down your debts. They are the avalanche and snowball method....

There are two schools of thought on how to pay down your debts. They are the avalanche and snowball method.

One is based on math and the other on feelings, i.e. motivation. While both are important, in my opinion when it comes to personal finances, math rules.

As you can see from the post the avalanche method focuses on paying down your debts with the highest rates first. Why? Your cards with the highest rates are costing you the most in interest expense. The longer you take to pay these debts off the more in interest expense you will pay, the quicker you pay them the less interest expense you pay.

The other side argues when paying off debt the most important factor is motivation, keeping people “in the game” and focused on staying disciplined with spending and making payments, they believe in the snowball method. While those factors are important, it can cost you hundreds, even thousands of dollars.

The snowball method focuses on paying down your debt based on balance owed. You pay the smallest balances first and that motivates you to stay on track. With this strategy you would ignore making larger payments on a $20,000 balance at 20% and instead opt to put them towards a $5,000 balance at 5%. As you can imagine while you are paying down that smaller balance, that bigger balance at 20% is only getting bigger!

Again, I believe the avalanche method is best for paying down your debts, the math makes it so. However, I do think motivation is important. You need to feel good about what you are doing.

I think sharing what you are doing with family and friends and letting them know when you hit milestones can help. They will encourage you to keep going and keep up the great work. I also think understanding the math is important as well and working with the right professional will help with that.

The more you understand how much the snowball method will cost you, the more you will feel encouraged to tackle those high interest rate debts.

If you haven’t put together a plan to pay off your debts you should contact your CERTIFIED FINANCIAL PLANNER™ to get started.


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