Are you looking to pay down debt but you’re not sure the best way to go about it? Read on and I’ll explain the major differences between the debt snowball effect and debt avalanche method.
Debt snowball consists of you paying off your smallest debt first, giving you a small victory. This encourages you continue on your path towards eliminating debt. This is what Dave Ramsey teaches in his books and Financial Peace University class. He teaches that behaviors are what need to change if you want to be financially independent. This method has a built in reinforcement of you paying off something no matter how little. Many people have had success with this method but mathematically the avalanche method will save you more money as far as interest costs go.
This is due to the fact the debt avalanche tackles your cards and loans with the highest interest rate first; allowing you to pay off the debt that is most likely costing you the most money. Once that debt is paid off, you’re no longer paying the high interest rate on what you owe. Then you work yourself down progressively to the lowest interest rate debt. The issue that can come from this method is you feel that the debt is so much, that you feel discouraged that you will never pay it off.
They Both Work!
Both methods work and as long as you pay off your debt, it doesn’t matter which you use. Some people like liquid laundry soap prefer powder but there is no point to arguing if the clothes get clean. This is the same with the debt snowball and debt avalanche, both achieve results; you just have to figure out which will work best for you and your situation. If you have had trouble sticking to paying off your debts in the past or get easily demotivated, try the debt snowball. If you feel you can stay focused until the last card or loan is paid off, try the debt avalanche method. It could save you hundreds to thousands of dollars depending on the amount of your debt and what kind it is. Finances are a very personal thing and you need to find what works best for you.
Regardless of which method you choose, start building an emergency fund. This is because it would be terrible if you paid down most of your debt, then your car broke down. If you have no savings, you have to put it on your credit card. An emergency savings will allow you to take care of true emergencies you can’t budget for. This amount can start out small even if it’s $20 a month. That builds over time and after a year you’ll have $240. That is enough to repair your car if something unexpected but small breaks on it.
Dave Ramsey is a proponent of starting out with $1000 emergency fund until you pay off all your debt but I think you should honestly look at what your financial needs truly are. For example, a military family leaving overseas may have to spend more then $1000 dollars to get back to the states if there is a family emergency. It’s a great start and it might be the perfect amount for you but please consider making the calculation(or having a professional help you figure it out) for your situation. Once you know the amount, build it up slowly as you are paying down your debts.
Becoming debt free can be a long, difficult journey but it is very freeing and worth the effort. It doesn’t matter how you get there as long as you get there. I hope this article dispelled some of the common methods people typically talk about. Please leave comments below on which method you are siding towards or tell us about how you got debt free.