How the Debt Snowball Method Works (& Why a Debt Avalanche is Better!)

Debt Snowball Vs. Debt Avalanche!

Getting out of debt is not fun, but it’s the only way to secure financial freedom. Imagine getting to keep all the income that isn’t taxed and put it away for a rainy day, or use however you like. If you have multiple balances to pay off, then you may be in a relentless and demoralizing cycle of paying bills with no real improvement over your situation. To help you dig yourself out of the rut your in, there are various methods of debt management. The most well known method is the Snowball Method. Here’s how it works and why another method, the Avalanche Method, will better serve you.

Building a Debt Snowball

The Debt Snowball Method is a simple process of systematically paying your bills off one by one in order of smallest balance to largest. The Snowball Method does not take interest rate into account. Rather, it is all about little victories that get rolled over into larger victories until eventually your debt is paid off.

The way it works is very simple. It’s probably the most simplistic way of looking at debt management. It only requires you to track your overall debt broken down into your various account balances. Next to that, keep track of minimum payments. That’s it. Start with paying down the smallest debt while making the minimum payments on the rest of your account balances. Once you cross one off the list, roll that minimum payment over to the next account. Your minimum payment remains the same each month, but it “snowballs” as you roll it into each new account which is larger than the one before it.

Why It Works

There are a couple of elements to the Snowball Method that make it a very appealing option. It doesn’t require you to put too much money in more than the minimum balances you are already paying. However, the method does assume that you are up to date on all of your payments. Aside from the low demand for output, the method is designed to give you little wins early on in the process, so you feel like you are getting somewhere. Because of the psychological effect of paying off the smaller balances quickly and the extreme simplicity of the plan it is a very popular choice for those who want an easy answer to debt management.

The Drawbacks of the Snowball Method

If you aren’t looking for easy answers, or if you want to pay off your debt quickly, the Snowball Method can be very frustrating. It relies more on psychological trickery than mathematics. Yes you can pay off the debt with little extra effort, but the money you spend doing it works against you in the long term. The plan ignores one of the most important and undeniable facets of debt and that’s the interest rate. Interest rates have a huge impact on your debt and your ability to pay it off. Yet, the Snowball Method pretends interest doesn’t exist. The result is often high interest rates on mounting balances.

Your minimum payment may stop those larger balances from growing, but the lower the balance, the lower the minimum payment. That means you are stuck making high minimum payments on a balance that will not go down, just so you can have a high five moment celebrating a much less urgent payoff.

What is a Debt Avalanche?

If a Debt Snowball is building your debt payoff starting with a small balance and rolling over into bigger and bigger balances, you can probably guess the intended impact of a Debt Avalanche. The Debt Avalanche Method is an accelerated payment plan that targets high interest debt and eliminates your debt more rapidly. Like the Snowball Method, the Avalanche Method makes use of minimum payments. However, instead of paying off the easiest balances first, it pays off the biggest threats to your debt.

By targeting high-interest, you reduce significant balances and keep them from growing or stalling your progress. It takes longer, but you can see the momentum build as your payments counter the interest and shrink your balance. Each payment makes a bigger and bigger impact. When you beat that balance it gets easier and easier to pay off the other smaller balances. This method rightly uses mathematics to solve a mathematical problem and saves you money compared to what you spend over time using the Snowball Method. It doesn’t use the mind games that the Snowball Method does, but it does have the psychological benefit of a growing momentum as big balances disappear faster and faster.

My recommendation? Use this PRO TIP: Use the Debt Avalanche COMBINED WITH The Spending Fast Method and you’ll get the psychological perks and motivation that is so appealing with the Debt Snowball method. It’s the best of both worlds!

What are YOUR thoughts on the Debt Snowball vs. The Debt Avalanche? Tell us in the comments! And, if you found this post helpful we’d love for you to share it!


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