Debt Snowball or Debt Avalanche – What is the right strategy to Combat Debt

by David

in Debt Management

Introduction

Consumer debt is an epidemic to which the materialistic human beings are very susceptible. Multiple debts can indeed make your life a misery but do you know what’s the right way out of this suffocating situation? Financial gurus suggest a number of approaches to eliminate your debt. Among them “Debt Snowball” and “Debt Avalanche” are two popular choices. So, which one is the right strategy for you? Let’s discuss.

A closer look at Debt Snowball

Popularized by the famed financial expert and radio talk show host Dave Ramsey, debt snowball is a process by which you pick the smallest debt to pay off first and gradually move towards the bigger ones. This method requires you to allot as much as possible to the smallest debt while paying the minimums on the rest. As your debts get cleared one by one, the snowball of cash that you can pay to clear your bigger debts gets bigger.

Debt snowball is certainly an effective way to extricate yourself from debt. It is best suited to revolving debt like credit card debt. A debt snowball calculator can help you to manage things better.

Also Read: 8 Mistakes to Avoid When Using a Credit Card

Understanding Debt Avalanche

Financial planners have been using this method for years. Debt avalanche is quite similar to the concept of debt snowball. With debt avalanche you order your debts by interest rate (from the highest to the lowest). You need to throw as much as possible at the debt with highest rate of interest while paying the minimums on the rest. After you succeed in paying off the chosen debt, target the next highest interest debt. Proceed in the same manner till you are a debt free and happy man.

Mathematically speaking, debt avalanche is cheaper and faster way to get out of debt than other similar plans. With debt avalanche you get rid of the most damaging debt first because higher interest rate would mean that eventually you have to pay more. You need to pay the minimum amount of interest if you use this method. So you can start saving and be a winner in the long run.

Debt Avalanche vs Debt Snowball

There has been much debate on which is the best debt reduction method-avalanche or snowball. Debt snowball focuses on the emotional side of human beings. It assumes that paying off the smaller debts will give you a sense of victory. This early success will motivate you to pay off the rest of your debts.

Debt avalanche, on the other hand, has a more rational appeal. If you believe that good financial decisions are rational decisions then avalanche is perhaps the way you should go. It helps you to save more bucks than debt snowball by eliminating the debt with highest interest first. Avalanche has been often criticized as it doesn’t take into consideration the “human element” or “motivation factor” in the debt reduction process. This can be countered by saying that people can always set their own milestones like paying off the first $1000. Reaching that mark would have the same effect on human psychology as paying off the first debt.

What’s the right choice for you?

Debt snowball is suitable for people who prefer quick results, are essentially emotional by nature and want a debt reduction plan that is simple to follow. It can be very effective for people who have a wide range of balances. However, people with an analytical bend of mind would be more benefited by debt avalanche. If you are disciplined enough and have the required patience then debt avalanche can maximize the use of your money. Remember that you have to keep following this plan without expecting any kind of “quick wins”.

You must realize that being debt-free is not just a dream but a distinct possibility. All you need is discipline and a solid financial plan. Both debt snowball and debt avalanche can play an instrumental role to lead you to a debt-free destination. Make sure that you stick to it and remember what Dave Ramsey says- “you can’t go wrong with getting out of debt”.

What are your views on the above two strategies followed to get out of debt. Which one do you prefer and why? Please share your valuable views in the Comments Section below.

[Editor’s Note: This post is submitted by our Guest Blogger David Brown. David is the founder of File Your Bankruptcy where he writes articles on Personal Finance. If you also want to write for EquiTipz, please read this.]

{ 10 comments… read them below or add one }

Rafael Awada June 16, 2010 at 1:51 pm

I am always blown away based on the facts behind the American people in credit card debt. I utilized a consumer debt settlement service and within about 13 months they were able to reduce the debt to around 40% of our total credit card debt. I think it was a wonderful decision.

Reply

Amado Medious July 7, 2010 at 9:46 am

Personal debt settlement seems to be evolving as a realistic strategic option for consumers suffering with credit card debt. Over the past year I have been following the debt market very closely and it is hard to guage what you receive for your cash. It is obvious that there are a great number or debt companies out there that deliver outstanding solutions and the customers really receive great benefit, but I’m also aware there are tons of service providers marketing their services that are only focused on collecting payments and signing up new customers. This is probably why we see so much new govt regulation in the debt settlement industry. My uncle used a debt company and seems to be very very very content with the overall results.

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Amandeep Singh July 16, 2010 at 2:18 am

I totally agree with you Amado, that there are very less services in the market that are actually working so that the consumers benefit. They look for only their own pocket and the sufferers are the end-users. This where entities like us come into picture and we have a very important role to play in “Spreading Financial Literacy” among masses… What do you think? 🙂

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remorgages August 5, 2010 at 11:11 pm

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Amandeep Singh August 12, 2010 at 2:15 am

Thanks a lot for the kind words 🙂

The credit goes to David, the author of the article…

You can read the other great articles by David here : http://www.equitipz.com/author/david/

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Jannika September 21, 2011 at 11:41 pm

I have exactly what info I want. Check, please. Wait, it’s free? Awmeose!

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lalit August 7, 2010 at 1:39 pm

Nifty is trading in tight range, Support of down side is 5400 and very good resistance on the upper side is 5600. Looks like market may remain in this range.

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Home Security November 25, 2010 at 11:49 am

everyone would love to be debt free and have some financial freedom then become rich ~”,

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nifty live charts July 13, 2011 at 8:52 am

becoming debt free is everybody’s wish. Your article enlightens everybody towards this common goal. Thank you for a well-written article.

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victor July 14, 2011 at 9:25 am

debt freedom is must for a peaceful life.

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