Going on the journey to repay debt is a significant step toward financial freedom, and selecting the right strategy can make all the difference. It’s not a one size fits all strategy. There are two popular methods though, the debt snowball and debt avalanche. Both offer distinct approaches to tackling debt. In our blog, we’ll explore the key points behind each method, examine their advantages and disadvantages, and hopefully help you decide which method aligns best with your financial goals.

The Debt Snowball Method

Principle

The debt snowball method focuses on starting small and then growing as you pay more off. Begin by paying off the smallest debt first, regardless of interest rates, while making minimum payments on other debts. For example, you have $100 debt and you have a $1000 debt. You would pay more to the $100 debt first and then when this has cleared, the surplus can then be paid towards the $1000 debt. 

Advantages

Psychological Boost – Paying off smaller debts quickly provides a sense of accomplishment and motivation. Seeing the $100 debt be wiped will provide some relief and positivity to continue your debt free journey.

Simplicity – The snowball method is simple and straightforward, making it easy to implement and follow. It could be the best strategy for you.

Disadvantages

Potentially Higher Interest Costs – As interest rates are not the primary consideration, this method may result in slightly higher overall interest costs.

Is it Right for You? – The debt snowball method is ideal for individuals who find motivation in quick wins and appreciate the psychological boost of paying off smaller debts rapidly.

The Debt Avalanche Method

Principle

The debt avalanche method puts paying off debts with the highest interest rates first. It aims to minimize the total interest paid over time. This method takes a little more focus as you will need to know your interest rates rather than just the balances as with the Debt Snowball method.

Advantages

Interest Savings – By addressing high-interest debts first, the avalanche method minimizes the long-term cost of borrowing. Whilst you repay the highest interest bearing debts, your lower interest debts will naturally incur interest but the impact will be signifcantly less.

Faster Overall Debt Repayment – Overall, this could be the quickest way to clear your debts.

Disadvantages

Psychological Challenge – Progress may be slower initially, but this isn’t something to be too worried about. Remember, your still clearing your debts, and you may face challenges staying motivated without the quick wins. The snowball method will clear some lower debts but remember, its not a one size fits all so consider both your options.

Is it Right for You? – The debt avalanche method is good for people who want to prioritize minimizing interest costs and are disciplined enough to stay committed to a longer-term strategy. The key word being disciplined. This means, you might not have any debts fall off as quickly as you’d like to see, but you’re still clearing your debts. 

Choosing the Right Strategy for You

Assess Your Motivation Style

Consider whether you’re motivated by quick wins and visible progress (debt snowball) or if you prefer a strategic, long-term approach (debt avalanche).

Evaluate Your Debt Profile

Examine the types and amounts of debts you owe. If your smallest debt has a high-interest rate, the avalanche method might be more financially efficient. Best thing to do here is to get your credit file and review balances and interest rates. 

Consider Your Financial Personality

This could be considered the most important part. Your financial personality and what you like play a crucial role. If simple and quick progress appeal to you, the snowball method may be more enjoyable. If you have some time to understand the interest rates and calculate your balances, the debt avalanche method might be better for you.

Hybrid Approach

Tailor your strategy to your unique situation. Maybe a hybrid approach where you combine elements of both methods to create a personalized plan. You could also you this to test each method to see which one you prefer.

Tips for Success Regardless of Method

Create a Budget

You should know how much you have available after your priroties like food and energy and rent etc. Once you have this figure, stick to it and add as much as you can to your budget.

Build an Emergency Fund

Building up a pot of cash can go a long way to not just paying your debts but maybe acting as a savings pot. You could also use this to treat yourself if you want to incentivize your efforts.

Seek Professional Guidance

Professional guidance can play an important role in how successful your chosen method is. Considering speaking to free debt advice services or maybe join a forum of like minded individuals who can share years of experience on the hows to’s and how not to’s.

Stay Consistent

Consistency is key. This journey wont be easy. It’s down to you to stay commited to your method and remember why you began your journey to debt free life.

Whether you choose the debt snowball method for its psychological boost or the debt avalanche method for its interest-saving benefits, the key is to remain committed to your plan. The methods we have spoke about above have proven successful for many people on their paths to debt freedom. Understanding your financial goals and motivation style will guide you in selecting the strategy that fits in with your goals. Remember, the most important factor is to take that first step toward a debt-free future.