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Success comes in bite-sized chunks. When you have what seems like an insurmountable amount of money owed to creditors, it can feel impossible and overwhelming. It can make you want to stick your head in the sand. But, there’s a way to win, and this can be applied to anything in your life: By breaking it down into realistic, manageable pieces. Here are a couple of methods you might consider: the debt snowball vs. debt avalanche. But which is best for you?
What is a Debt Snowball?
When you pay off debt using the snowball method, you begin tackling the smallest debt first. Make a list of all of your debts, and put them in order of smallest to largest, so you know which one to start with. The idea is that you keep paying the minimum payments on all of your debts, but throw as much spare money as you can at your smallest debt, until it’s all paid off. We did this when we paid off our mobile phone contracts which were about £300 each.
When the smallest debt is paid, you add that to the minimum payment on the next smallest debt. As before, keep throwing as much extra money at it as you can, until it’s all paid off. Then, you add that minimum payment (which will be growing) to the minimum payment on next smallest debt.
The amount you’re paying to each debt will grow as you pay them off, effectively creating a “snowball” method. Think of a giant snowball rolling down a hill that gets bigger as it collects more snow (money), gaining speed and momentum.
What is the Debt Avalanche Method?
With the debt avalanche, it’s (kind of) similar to the snowball method, but you list your debts in order of interest rate from highest to lowest, so it’s in reverse. You do this regardless of the total size of the debt. You begin to pay off your debts with the highest interest rate first. The idea behind that is that (in theory) once you’ve tackled the high-interest debts first, you’re paying less money in the long run.
Here’s an example:
Credit card 1: £4,424 at 21.9% APR
Credit card 2: £2,511 at 20.39% APR
In this instance, it would make sense credit card #1 is paid off first because it’s got a higher interest rate. Not only that, but interest compounds. So you’re not just paying interest on the balance, you’re paying interest on the interest.
So Which Debt Repayment Method is Best?
As with most things, really, choosing whether to go debt snowball vs. debt avalanche depends on your point of view! As referenced in this post by Money Under 30, it’s really down to personal preference and there’s not much in it as to which method might be better. The only difference is persistence and consistency in paying it off.
Personally, I began with the snowball method as none of my debts were attracting interest at time time. But once my interest-free periods ran out, it all went out the window and I didn’t know which way to turn, because all I could see was that I was paying over the minimum payments on both of my credit cards, 40-50% of which was going on interest.
When you get to the point where you can see exactly how much money you’re losing to credit card and finance companies, it really is soul-destroying. For us, the only option was to consolidate the credit cards into one loan and one low monthly payment. But as I mentioned in this post here, that’s only really an option once you’ve beat the debt cycle.
For years, I would consolidate my debts, then continue to use my credit cards. Ignorance was not bliss, ignorance cost me a LOT of money over the years. Debt consolidation is not something I advocate if you still haven’t tackled your spending and got a good handle on managing your money.
Debt Snowball Method for Fast Visible Results
In my opinion, the debt snowball method is the one which can provide results in the quickest way possible, but it also depends on your circumstances. Things like how much you have to put towards your debt, what your income is, what your ability to earn more is, and your ability to save money. Things like crushed confidence and pandemics can have an impact on your earning ability!
When I first started my debt-free journey in 2018, this is what my debt snowball looked like. I started with an outstanding utility bill, then tackled our mobile phone contracts. Pretty soon, things were ramping up. Within 9 months, I’d paid off £5,000 worth of debt. When you consider that you’d take out a loan for £5,000, paying it back over 60 months (5 years), paying it back that quickly is a pretty amazing achievement!
Personally, I couldn’t maintain the “gazelle intensity” of paying off debt that quickly. I hit burnout, and had to slow things down. In just over 2 years, I paid off £12,000 worth of debt, and that’s something I’m incredibly proud of. But, I wouldn’t have been able to do it if I didn’t have a plan, and hadn’t taken steps to manage our finances properly. It’s all too easy to keep spending and have no clue on the state of your bank account or the bigger financial picture.
So if you want to get out of debt, make a plan to start. Make a plan to break it down into manageable chunks, and set yourself a timescale to achieve these goals by a certain date. The only way to get out of debt is to pay it back. And your journey starts right now.