A Battle of Size vs. Interest Rate
Long now has been the debate on the best way to pay off debt. Do I start with the smallest debt or the one with the highest interest rate? What people keep failing to realize when reading or listening to “financial gurus” is that everyone is different, and their financial situation can change from time to time.
Take what you hear or read online with a grain of salt, even from me.
I’m no expert, I’m just sharing my experience in the hopes someone out there IS like me, and this may help them get out of debt more efficiently or reach financial freedom sooner. Let’s break down the two options Snowball vs. Avalanche and discuss who they work best for, and when they should be used for paying off debt.
Snowball - The Smallest Debt First
Known by many as the “Debt Snowball”, aligning your debts from the smallest balance to the largest and pay them off one by one, starting with the smallest balance is a proven method to help reduce one’s debt. For those of us that are not good at saving or are just starting out on their financial success journey, this is a great place to begin. It is the quickest way to experience a sense of accomplishment and see actual progress. Paying off debt can be mentally exhausting, especially if you owe a significant amount, and having positive progressive milestones along the way can help keep the motivation up and the snowball rolling. Some financial advisers, like Dave Ramsey, are big proponents of the Debt Snowball method, I believe, because the majority of their audiences are people that will only clue in when hearing about “easy” methods that can deliver as close to instant gratification as possible. Yes, I am sure there are many followers that are already financially successful, but I’m guessing those people were already somewhat financially coherent and don’t need the constant reassurance that the Debt Snowball provides.
Avalanche - The Highest Interest Rate First
Somewhat contrary to the Snowball, the “Debt Avalanche” is the method of aligning all your debts from the one with the highest interest rate to the one with the lowest and start paying them off one by one, starting with the one with the highest interest rate. For those who constantly look at their entire financial situation and want to be the most self-serving with their money, like me, paying off the debts with the highest interest rates may be a better option. If you have a pretty good handle on your finances, and aren’t living beyond your means, this method may interest you. While it may take longer to rid yourself of all of your debt, it will end up saving you the most money in the end, as paying down debts with the largest interest rates first reduces the total amount of interest paid across all of your debts. This is the method that I personally follow, and I’ve been able to pay off all of my debts other than my house in just a few years of really dedicating myself to saving my money and paying off my debt.
Remember, this is your snowman of debt. What works best for someone else may not be what works best for you. Do your own internal research and figure out which method best suits your needs and lifestyle.
Comentários