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Debt Snowball Vs. Debt Avalanche Method: Which Will You Choose? 

First off, what is a debt snowball and why the hell would I want one?

A debt snowball, or a debt avalanche, is simply a metaphor for paying off debt.

If you have any kind of debt, then this applies to you. Mortgage debt is something entirely different which we can discuss in another section, but if you have credit card debt, personal loans, student loan debt, charge card debt, auto debt then this is all applicable.

The Debt Snowball Method:

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Paying off your smallest balance loan first, while maintaining your minimum monthly payments on all your other debts thus avoiding accruing interest (keeping those other debts at bay).

 

The Debt Avalanche Method:

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Paying off your highest interest rate loan first, while maintaining your minimum payment on your other loans and thus paying off faster.

Now a core concept with EITHER method is that when you are done paying off a loan you allocate the excess payment to your next loan in the chain. I’ll give you an example.

 

Here’s an example of the debt snowball in effect:

Auto Payment – $350 / month – 5% interest $4000 principle remaining

Student Loan Debt – $250 / month – 3.61% interest $19,700 principle remaining

Credit card debt – $189 / month – 19.99% interest on $7,500 principle remaining

You would take the lowest balance loan and pay that first. In this case it would be your auto payment and continue paying your other minimum payments:

Auto – $350 – 5% loan

Credit card – $189 – 19.99% loan

Student Loan – $250 – 3.61% loan

Total Payments each month = $789

Then once you pay off the first loan in the sequence you will allocate the payment you had for that loan towards the next loan.

Auto – Done

Credit card – $189 + $350 (former auto payment) = $539

Student Loan – $250

Total Payments each month = $789

So you see your total budgeted each month stays the same, and any extra income you can throw at the debt pays down PRINCIPLE which is a GOOD thing!

Here’s an example of the debt Avalanche in effect with the same numbers:

Auto Payment – $350 / month – 5% interest $4000 principle remaining

Student Loan Debt – $250 / month – 3.61% interest $19,700 principle remaining

Credit card debt – $189 / month – 19.99% interest on $7,500 principle remaining

You would take the highest interest loan and pay that first. In this case it would be your  payment and continue paying your other minimum payments:

Credit card – $189

Auto – $350

Student Loan – $250

Total Payments each month = $789

You can see, same monthly amount, quicker repayment of your loans because you are paying more principle and less interest in the long run. This is the method I began with, not knowing that there were two ways to do this, and just kept hammering my debt until I knocked it out and got to freedom.

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