Managing Debt: The Avalanche Vs. Snowball Method
You can’t deny the fact that whether a debt is small or big, it’s still something that most Canadians fear. Although most people consider debt payments as their top priority, the fact of how-to is still an issue that burdens them. In fact, the latest MNP Consumer Debt Index reveals that there is an increase in the number of Canadians who are anxious about repaying their debts. Plus, the rise in interest charges, triggers the financial struggles of most residents.
Moreover, the MNP Consumer Debt Index, reveals that 33% of Canadians confirm that they can no longer cope up in paying their bills each month, including their debt payments. Besides, what’s more alarming is that 48% confirm that they’re $200 or less from their inability to comply with their financial responsibilities each month.
So, if you feel that you can no longer carry your debt load, there are several alternatives that you can execute to pay it off faster than usual. These alternatives are the avalanche method and the snowball method. Both are considered efficient and effective if executed accordingly. However, each also bears both positive and negative aspects.
In This Guide...
Debt Snowball
The Debt snowball aims to pay off the small amount that you owe down to the biggest. For instance, if you have credit cards with credit card A holding $100, credit card B with $250, and credit card C with $1,000. When using the snowball method, you will have to pay off credit card A, then credit card B, and the last would be credit card C. However, this does not mean that you won’t be making any payments on credit card B and C when you pay off credit card A. You will still be paying the minimum required each month for credit card B and C while paying significant amount or full on credit card A.
This method was made known by David Ramsay, a personal finance educator. The below tips was provided on his website:
- List your debts from smallest to largest.
- Make minimum payments on all your debts except the smallest.
- Pay as much as possible on your smallest debt.
- Repeat until each debt is paid in full.
Who is it for?
The debt snowball is a favorable strategy for someone who acquires more enthusiasm and motivation when seeing progress or prompt result. So, if you’re fond of creating a to-do list, this method might work for you since ticking or crossing out your to-dos might trigger you to be more driven in eliminating each item on your list.
Positives
With the analysis result from Journal Consumer Research, this is a more efficient method since the small achievements made in eliminating your debt can greatly motivate you pay off the others.
Negatives
The negative aspect of a snowball method is that you will be left paying more interests since you’re only paying the minimum payment of debts that might hold the highest interest rate. In fact, David Ramsay stated that the reason why it works is that it’s focused on behavior modification, rather than math or calculations.
Avalanche Method
A more practical tip in paying off your debt focuses on eliminating the debt, which accumulates the highest interest charges while paying the minimum amount for all the other debts. This method is called the Avalanche method. In putting the avalanche method in place, you will have to determine the debt which has the highest interest rates down to the lowest.
For instance, if you have acquired a line of credit, credit card debt, and mortgage, using the avalanche method would make you pay first for the credit card debt, next is the line of credit, and the last would be your mortgage. In some cases, wherein you may have bills that are overdue and accumulates a significant expense than your other obligations, an avalanche method necessitates you to pay it off first.
Who is it for?
An Avalanche method is suitable for those with debts that bears significant interest rates. It is the most practical means to avoid piled up debts that are stacking huge amounts of interest fees or late fees.
Pros
The amount that you owe will reduce faster by targeting the one that bears the largest cost. Normally, your small debt carries the highest interest charges such as your credit card debt, while the big ones such as a mortgage are normally the cheapest. In this manner, following the avalanche method is likely enjoying the benefits that you can get from a snowball method as well.
Cons
The negative side of the avalanche method is that it may take longer before you can perceive the outcome. Though it cost an insignificant amount, you may tend to feel paying the same bills each month. However, you can keep track of your payments to see the progress and sustain the momentum of knocking down your debt.
Points to Remember
Repaying your debts may seem impossible, but it is possible with the right method and attitude. You can choose which payment plan works for you and make sure you treat it as your top priority. Besides, what you need is being diligent and responsible in complying with the payment terms. You should also avoid acquiring new consumer debt as this may just worsen your situation. Bear in mind that taking your debt for granted can lead you to potential bankruptcy.
