AVID Chat #62: Debt Snowball v. Avalanche

Want to pay off your debt this year? Looking for ways to stay on track as you move toward your goal of being debt-free? We’re covering two commonly used debt payoff strategies in this week’s AVID Chat! 

Check out our timestamp here:

1:00 The Psychological Barrier to Creating a Debt Payoff Plan

2:15 Debt Snowball v Debt Avalanche

4:00 Which Is Right For You?

6:15 Debt Repayment and Cash Flow

8:00 Tactics v Strategy

10:10 The Tricky Part of Debt Repayment 

11:50 Any Strategy Is Better Than No Strategy!

The truth is that paying off your debt is hard. Whether you’re dealing with student loans, credit card debt, or personal loans, there tends to be a psychological barrier to becoming debt-free. This is partly because paying off debt is confusing and, sometimes, overwhelming. If you have multiple different types of debt, you may feel uncertain about which to tackle first. 

“Gamifying” the debt payoff process can help. Two options for creating a debt payoff system include the debt snowball and the debt avalanche. Here’s how the two work, respectively:

Debt Snowball

A debt snowball is a strategy that focuses on paying off your smallest loan first. To start this strategy, make a list of all of your outstanding debts in order from smallest balance to largest. Set everything but your smallest-balance debt so that you’re making the minimum monthly payments. Then, take any “extra” funds you’re planning to funnel towards debt repayment and put them toward your debt that has the smallest balance.

Once that small-balance debt is repaid, you “snowball” the funds you were using to pay that bill off into the next bill.

The idea behind the debt snowball strategy is that you start with a small-balance debt to pay it off quickly. That excitement and feeling of pride that comes when you pay off a bill gives you momentum to continue paying off the next debt you owe. As your payments continue to “snowball” and grow in size, you’re able to knock out your debt obligations quickly and feel accomplished along the way. 

Debt Avalanche

The debt avalanche strategy focuses on paying off your debt with the biggest interest rate first. For this strategy, you organize your list of debt obligations from largest to smallest interest rate - total balance doesn’t matter. You set all of your monthly payments to the minimum except for your bill with the largest interest rate. Once you completely pay that off, you can “avalanche” the funds that were going toward that bill into the next debt obligation on your list. 

The idea behind the debt avalanche strategy is that you are saving more money in the long run by paying off debts with a high-interest rate first. 

Neither of these strategies is “right.” Every person is different, and different methods will motivate them. If you know you need more momentum with your debt repayment, the snowball method may work for you. If you are motivated by saving money, consider the avalanche strategy. 

Whichever option you choose, congratulations on starting your journey to becoming debt-free! If you are looking for an accountability partner, or an expert who can help you stay on track, we’d love to talk. Contact us today by clicking here: https://avidplanning.com/contact