Debt Snowball and Debt Avalanche Methods
What are they?
In the world of finance and paying off debt,
you will find everyone raving about two different methods to tackle and repay
their debt - ‘Debt Snowball’ or ‘Debt Avalanche’.
Debt Snowball
Using the debt Snowball method, you make a
list of all your debts from smallest amount owing to largest (everything but
the mortgage) and regardless of interest rate or repayment amount, you pay off
the smallest first. You still carry on making minimum payments on all the other
debts but focus all your efforts on the smallest and pay as much off that as
you can. Once that one is cleared, you move to the next smallest and pay
everything you can off that one and so on.
As you pay off more debts, the minimum
payments made to the debt that has finished will be available to put towards
the next smallest debt and this speeds up paying the debt back, effectively
like a snowball it builds momentum.
Using the Debt Snowball method, you receive
the success of paying off a debt quicker as it’s the smallest amount. The
psychological impact creates ‘good’ feelings which ultimately spurs you on to
the next debt and so on. This is a great method to use if you lack in
motivation and like/need quicker results.
Debt Snowball Example:
|
|
Interest Rate % |
Total Balance Outstanding £ |
Minimum Repayment £ |
|
Credit Card 1 |
29.9 |
14,000 |
397.00 |
|
Credit Card 2 |
20.9 |
11,000 |
250 |
|
Credit Card 3 |
0 |
9,000 |
80 |
|
Overdraft |
29.9 |
2,000 |
0 |
|
Store Card X |
39.9 |
750 |
80 |
|
Store Card B |
19.9 |
450 |
25 |
As you can see, I have listed the different
debts in order of total balance outstanding (in bold because both interest rate
and repayment amount are irrelevant for this method). I would still make
minimum repayments on all my debts but the smallest one I would make the
minimum plus anything else I can throw at it!
Once the store card B has gone, I will have
£25.00 extra (store card B’s minimum repayment) to put towards paying off the
next smallest debt, in this example it would be store card X.
Debt Avalanche
Using the debt avalanche method, you would
make a list of all your debts (everything but the mortgage) and make minimum
payments on everything as before, but the debt that has the highest interest
rate you would throw everything at as well as pay the minimum. This effectively
saves you money by paying less interest over time, leaving the 0% and lower
rates till last so you benefit from any 0% interest deals you have. This can
save you money in the long run, but you will need to be a patient and
self-motivated person as you won’t get as quicker hit like the debt snowball
method and you could be waiting longer for success.
Debt Avalanche Example:
|
|
Interest Rate % |
Balance Outstanding £ |
Minimum Repayment £ |
|
Credit Card 1 |
29.9 |
14,000 |
397.00 |
|
Credit Card 2 |
20.9 |
11,000 |
250 |
|
Credit Card 3 |
0 |
9,000 |
80 |
|
Overdraft |
29.9 |
2,000 |
0 |
|
Store Card X |
39.9 |
750 |
80 |
|
Store Card B |
19.9 |
450 |
25 |
Using the previous example, I have highlighted
in bold the interest rate box as this will now become the priority and store
card X with an interest rate of 39.9 % will be the first one to tackle.
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