Should you use the Debt Snowball or Debt Avalanche method?

When it comes to paying off your pesky credit card, student loans, lines of credit, etc., there are all kinds of ways to go about tackling your debt. Two methods that seem to come up often are the snowball and avalanche strategies.

Debt Snowball

In the Debt Snowball, it’s like assembling your offense for a series of quick wins. You target the smallest loan balances first, creating a surge of motivation as each one is tackled. Line up your loans from the smallest to the largest and charge at the smallest balance aggressively. As you score victories, take the funds you were allocating to the paid-off loan and set them onto the next smallest balance. Repeat this cycle until your loans are clear. This playbook, endorsed by financial maestro Dave Ramsey , is hailed for its morale-boosting effects.

However, every game plan has its drawbacks.

With the Debt Snowball, you might find yourself paying more in interest over the long run. By prioritizing the smaller loans, you may leave the larger, potentially higher-interest loans on the field longer. It’s akin to winning battles but losing the war, risking accruing additional interest as time ticks away.

Debt Avalanche

Now, let’s switch arenas to the Debt Avalanche. This approach aims to save you the most money. Instead of starting with the smallest balances, you target the loans with the highest interest rates, irrespective of their size. List your debts, kick off with the highest interest rate, and move down the list. After eliminating the debt with the top interest rate, redirect the funds to the next-highest rate. This method prioritizes overall savings, making it an ideal playbook for those motivated by the long-term financial game rather than quick wins.

That’s all great, but does it really matter?

Let’s take a closer look through real numbers:

$5,000 credit card debt at 22% interest

$16,000 line of credit at 11% interest

$45,000 student loans at 1% interest.

With both the snowball and avalanche method, the sequences of events are the same. Pay the credit card, then the line of credit, and finally the student loans.

Let’s switch it up and change the numbers:

$16,000 credit card at 22% interest

$5,000 line of credit at 11% interest

$45,000 student loans at 1% interest.

In this scenario, the snowball method saves $692 over the course of 77 months. Not peanuts, but just over $8 per month.

Refinance

But there’s an additional play to consider, a secret weapon in the arsenal: refinancing. Opting for a lower interest rate through refinancing is like recruiting a star player to bolster your team. A mere 1% reduction in APR could translate to a substantial financial gain, potentially saving thousands over the loan’s lifespan. It’s a strategic move that shouldn’t be overlooked when crafting your winning financial playbook. Give your lender a call, and look to consolidate debt at a lower interest rate. No ask, no get.?

We believe that the tactics are more important than the strategy. It’s the individual steps that matter, things like cash flow awareness, creating an emergency fund , budgeting, regular debt repayments, planning, and action. Sure, you can afford one extra latte a month with the snowball method, but if there’s no plan in place, does it really matter? Speak with an advisor to tackle your debt and live the life you want.