Do you want to pay off debt? But find it overwhelming? With the right repayment method, you can get on track to become debt free in no time.
How does the debt snowball method work?
You start by paying off debt in order of smallest to largest. Once the smallest debt is paid in full, you would then roll the money you were using on that smaller debt into the next smallest balance.
The first thing you want to do is list your debt from smallest to largest disregarding interest rate. Make minimum payments on all your debt with the exception of the smallest debt you owe. Once you’ve made all your minimum payments, pay as much as you can on the smallest debt. You would continue this process until each debt has been fully paid.
Here’s an example of the Debt Snowball method:
- $500 visa bill
- $800 mastercard bill
- $1200 target card bill
- $8000 car loan
You would make minimum payments on the mastercard bill, target bill and car loan. Once you have paid the minimum on each of those, you would then make the minimum PLUS extra payments on the visa bill. Once the visa bill has been paid off, you would use the money you used to allocate for the visa bill and now use that towards the mastercard bill.
Why does the debt snowball method work?
The reason the debt snowball method has seen such success is mainly due to its behavior effects. Since you start paying off your smallest debt, you start to see progress sooner. Seeing those zero balances will become motivating and keep you on track to continue paying the rest of your debts on time.
If you are interested in the Debt Snowball Method, check out this free Debt Calculator.
How does the debt avalanche method work?
You start by paying off debt in order of the highest interest rate to the lowest interest rate. This is the complete opposite of the snowball method as you read earlier.
The total balance is unimportant as you are only looking at your interest rates. If you have a debt balance of $10,000 at 15% interest and a debt balance of $5000 at 5% interest, the avalanche method teaches you to pay off that $10,000 debt first.
Why doesn’t the debt avalanche method work?
Since the debt avalanche method starts with the highest debt amount, it will take a longer amount of time to see any real changes. With the snowball method, you will start seeing zero balances much sooner.
Additionally, the lack of results will take a toll on your motivation to continue with your debt repayment process. One of the biggest motivators with the debt snowball method is its positive effects on personal motivation seeing your debt balances zero out.