By  Tue Feb 11, 2014

The Debt Snowball Method vs. Debt Avalanche

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In comparing debt reduction methods, two techniques that are often mentioned include debt snowball and debt avalanche methods. The reason is quite simple — they are both, in a way, the same thing.

The Debt Snowball Method

The debt snowball method of debt payment instructs individuals to begin by paying smaller debts in order to gain momentum and traction. From that point, the success of eliminating those smaller debts will snowball into paying larger debts. On Dave Ramsey’s site, creator of the debt snowball, he posits that:

“The math seems to lean more toward paying the highest interest debts first, but what I have learned is that personal finance is 20 percent head knowledge and 80 percent behavior. You need some quick wins in order to stay pumped enough to get out of debt completely.”

The technique is more psychologically geared toward supplying a person with a feeling of accomplishment. With this method, individuals are instructed to stop payment on everything except for the minimum payment for the other debts in order to whittle down and eliminate the one bill or debt they are focused on.

The Debt Avalanche Method

The debt avalanche method of debt payment works essentially the same way, except the individual is instructed to start by paying off the highest debts immediately, which will crescendo into an avalanche. Financially speaking, this method will save successful debtors a ton on interest.

So, which is better?

Psychologically speaking, it’s easy to see the appeal in applying the debt snowball method. The discouraged individual gets a boost from tackling their payments and the feeling of accomplishment is sufficient enough to bolster their spirits and motivations.

Since many debt problems do spring out of psychological reasons, this method may create more of a substantial spark.

Financially speaking, you can’t beat the debt avalanche method of paying down debt. By eliminating the biggest debts first, they wipe out the biggest source of interest, saving them money in the long-run. This method is concretely the best for those who want to turn a new leaf and make a huge commitment to being debt-free. However, the morale boost is not as strong a component in this technique as it is with the debt snowball.

When considering which debt-reduction techniques are right for you, you’ll need to take into account personal preference and how much debt you can realistically pay off at a time.

If you convince yourself you’ll be able to commit to the avalanche method, the initial feeling of success will be harder to come by. However, if you know you’re a committed person, then prioritizing your debts from biggest to smallest will be a much better value.

 

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