Friday Financial Quickie
(The first in a series of quick hitter Friday personal finance posts)
Debt Avalanche vs. Debt Snowball
There are two well known debt repayment strategies known as the debt avalanche and debt snowball methods. Here’s the difference:
Debt Avalanche: Pay off the debt with the highest interest rate first, while still paying minimums on all other debts. When you pay off the first debt, move on to the debt with the next highest interest rate, and pay as much as possible, and so on….
Debt Snowball: Pay off the smallest debt first, while still paying minimums on all other debts. When you pay off the first debt, move on to the next smallest debt, and pay as much as possible, and so on… (made popular by Dave Ramsey).
Which One is Better?
From a purely numbers standpoint, the debt avalanche method is the faster of the two. I’m a numbers guy, so this is how we paid off our student loans. I chose to pay as a little interest as possible.
The debt snowball method provides small victories and a feeling of “my hard work and penny pinching is paying off”. When you see the balance go to zero, you’ll feel a sense of accomplishment.
Ultimately, the best method is whichever you mentally respond the best to. You control your financial destiny. Which one motivates you? Which one will you stick with?
If you have multiple debts, and they seem too big to tackle, the debt snowball may provide you the small wins and motivation to continue. If you’re motivated by numbers and efficiency, the avalanche may be better.
Just remember, your debts won’t pay themselves. Start today, choose a method and get after it. Get your financial show on the road.
That’s all for today – tomorrow is The Wealth Hound’s one week anniversary!
Have a great weekend!
The Wealth Hound