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 129.914,000397.00
Credit Card 220.911,000250
Credit Card 309,00080
Overdraft29.92,0000
Store Card X39.975080
Store Card B19.945025

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 129.914,000397.00
Credit Card 220.911,000250
Credit Card 309,00080
Overdraft29.92,0000
Store Card X39.975080
Store Card B19.945025

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.

Review

Both the Debt Snowball and Debt Avalanche Methods have been proven to successfully help people to pay off debt and there isn’t a right or wrong method to go for, it will be whatever works for you. Maybe it’s best to try them both, but I’d recommend the Debt Snowball first. And if neither of them work, I found another option …

What to do if the Debt Snowball and Debt Avalanche Methods don’t work for you?

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