Trying to pay off debt may seem overwhelming, but it is manageable if you put a good plan in place. Two strategies you can take to pay down debt are the avalanche method and the snowball method. The strategies have the same goal but slightly different approaches.
Both methods require that you make minimum payments on all your debts except for one that you prioritize paying off first. Once that one debt is paid off, you select another as your priority. You continue this pattern until you’ve paid off all your debt.
The difference between the methods is that one prioritizes paying off the debt with the highest interest rates while the other focuses on paying off the smallest of your debt first. The one that is right to you depends on how you want to prioritize your debts.
Avalanche Method
The avalanche method is focused on paying the debt with the highest interest rate first. Using this method, you will make minimum payment on all your debts except for the debt that has the highest interest rate. For that debt, you will pay as much money as you can to decrease the debt faster.
Pros of Avalanche Method
By paying off the highest-rate debt first, the avalanche method could save more money in interest over time. Focusing on the highest interest rate debt can also reduce the time it takes to pay off the debt.
Cons of Avalanche Method
The avalanche method requires discipline to consistently put extra money into paying off a particular debt. If you can’t maintain the discipline or lose motivation, the avalanche method will not work as effectively. The avalanche method also makes the assumption that you can afford to make more payments than the minimum. If your financial situation changes, you might need to pause or stop the avalanche method.
Snowball Method
The snowball method focuses on paying off the debit with the lowest amount due first. Like the avalanche method, you will make a minimum payment on all your debts and put any extra money toward the smallest debt. Once that debt is paid, you will combine the money previously devoted to that payment with the minimum payment of the next smallest debt.
Pros of Snowball Method
The primary advantage of the snowball method is that you will see results faster. After all, it’s easier to pay off a $100 debt than a $10,000 debt. These “wins” can be very motivating and encourage you to stay committed to your debt repayment plan.
Cons of Snowball Method
The downside of the snowball method is that it doesn’t reduce the amount you pay in overall interest as much as the avalanche method. Because of this, it can take longer to pay off your total debt.
Which Method to Use
The choice between the avalanche and snowball methods really comes down to your financial circumstances and personality. If it’s important for you to save money when paying off debt and you have the discipline to do it, the avalanche method is the best approach for you. If you find you are someone who values the small “wins” and are okay with paying more in interest than you would with the avalanche method, the snowball method is for you.
Regardless of the method you choose, you are making a commitment to pay off debt, and that has to feel good.
Have questions or need assistance?
If you have questions about this topic or need assistance with your banking needs, please speak to one of our bankers at your local Bar Harbor Bank & Trust branch. We’re here to help you build a solid financial future.
