The debt portfolio of many people keeps on rising. A CNBC report places the US credit card debt at $930 billion. The amount in itself is staggering, considering it does not cover other lending options. Such include personal loans, mortgages, and so on.
The report goes on to show that the highest delinquency in repayments is amongst younger Americans. The rate has been on a steady increase since 2016.
You may very well be part of the statistics. But, there is a way to get out of debt fast using either snowball or avalanche methods. Let’s see what they are, including the pros and cons.
Start by Listing Down All Your Debts
The first step is having clarity on your debt portfolio. That means jotting down every single amount you owe.
We know that it can be easy to lose track of your expenses. Professionals from Chunk Finance have come up with a tool that can help by providing an overview of your finances. When you sign up to the platform, you get:-
- A way to keep your credit score strong through credit card utilization tracking
- Notifications on all aspects of your finances. These include balance updates, overdraft, spending thresholds, and so much more
- Timely reports in the form of graphs or charts. The visualizations make it easier to understand your expenditure
- Excellent tips on minimizing interest rates and other debt paydown methods.
At this stage, it helps to have a budget to know where all your money goes. Look at some practical ways to cut down on expenditure. These include embracing DIYs, avoiding costly night-outs, using public transportation instead of cabs, and so on.
The next step is to choose between the debt snowball and avalanche debt repayment methods.
Debt Snowball Payment Method
Indulge us for a second by taking a walk down memory lane. Do you remember how you would build a snowball out in the yard? It starts with a small amount of snow. As you roll it, it keeps on collecting more snow until the ball becomes big. That is what the debt snowball method of debt repayment entails.
Here is how to go about making payments with the debt snowball method.
- Take the debt list you developed in step 1 above
- List the debts from the lowest to the highest
- Allocate a minimum payment to all the debts
- Put any extra amount to the payment of the lowest debt.
- Once you finish the lowest debt, move on to the next lowest. Let’s say you pay $100 to the lowest.
Once you clear that, it means you have a $100 surplus. Now take this amount, and any other extra, towards clearing the next lowest debt. That rollover of surplus amounts is what adds to the snowball build.
The most significant advantage of the snowball method is quick wins. It feels fantastic to cross off debts from your list. That motivation is enough to keep some people on track.
It is also an excellent way of paying off debt fast with low income. Managing the small amounts first means less strain on available finances.
The main disadvantage is that the method can get expensive in the long run. The high-interest rates keep on collecting, thus increasing your debt.
Debt Avalanche Payment Method
The debt avalanche method tackles the high-interest debts first.
Start by flipping the debt list from highest to lowest amounts. Then, apply the same technique as you would with the snowball method.
The avalanche method allows you to knock off the debt balance faster. Let’s say you were paying $500 to the highest amount. And, you can add a surplus of $100. That means payments of $600 per month.
Once you finish that debt, rollover the $600 plus any excess to the next highest amount.
What you will realize is that you pay off your debts much faster. It is also an effective way to minimize the amount you pay in interest.
But, it is possible to lose motivation. Some high-interest loans may take a long time to pay. It can start to feel like you are not making any progress in clearing the debts.
If there is a method that requires discipline and dedication, it is the debt avalanche method.
Which Is the Better Option Between Snowball and Debt Avalanche
It is not easy to say which is the better option between the two. Start by taking stock of your financial situation before making the decision. Let’s say you decide on the avalanche method.
The one thing you must be clear about is your ability to handle the payments. If your financial situation makes you skip or delay the payments, you still have to deal with the high-interest rates. It could end up looking like you are not making any difference to your debt portfolio.
The snowball method allows for a little bit more flexibility. As we stated, you can even pay off debt fast with a low income. Allocate the surplus amount, no matter how small, to the minimum payments.
With smart money management tips, you should be able to manage these. The smaller amounts make it easier to stay on track with the debt repayment.
Debt snowball and debt avalanche methods of debt payments are both excellent. They provide a convenient way to get out of debt faster.
The snowball method starts from the smallest to the highest amount. Avalanche is the opposite, starting from highest to smallest amount.
The best way to decide which would work well for you is to have clarity on your financial situation. If you cannot afford to make large repayments on a regular basis, go for the snowball debt repayment method.
There is a lot of motivation in seeing the debts fall off the list. But, you should know that in the long run, you could end up paying more interest.
Avalanche is fantastic because you remove the high-interest debt first. That can give you some breathing space when taking care of the rest. Once you get out of debt, practice financial Prudence. You don’t want to find yourself back in the same boat after some time.
Also Read: The Freedom Debt Relief Story