In the previous part of this article, we discussed the debt snowball method and its emphasis on paying off debts based on their balances. Now, let’s delve into the debt avalanche method, which takes a different approach by prioritizing debts based on their interest rates.
The debt avalanche method focuses on minimizing the overall interest paid during the debt repayment process. Here’s how it works:
Step 1: List and rank your debts
Similar to the debt snowball method, begin by creating a list of all your debts, including the outstanding balances and their respective interest rates. This time, rank the debts from the highest interest rate to the lowest.
Step 2: Minimum payments for all debts
As with the debt snowball method, make the minimum monthly payment on each debt to fulfill your obligations and avoid penalties.
Step 3: Allocate extra funds towards the highest interest debt
In addition to the minimum payments, allocate any additional money you have towards the debt with the highest interest rate. By targeting the high-interest debt, you aim to reduce the overall interest you’ll pay over time.
Step 4: Roll over payments to next highest interest debt
Once the highest-interest debt is paid off, take the minimum payment you were making on that debt and add it to the minimum payment of the next highest-interest debt. This approach allows you to tackle the costliest debts more aggressively.
Step 5: Continue the avalanche
Repeat this process, rolling over the payments from the previous debts to the next one on your list. As with the debt snowball method, the repayments snowball, accelerating your progress towards becoming debt-free.
The debt avalanche method focuses on minimizing the amount of money spent on interest payments, potentially helping individuals save more in the long run compared to the debt snowball method.
However, one drawback to consider is the psychological aspect. Since this method does not prioritize quick wins based on balance size, it may take longer to pay off the first debt, leading to a perceived lack of progress. Some individuals may find it challenging to stay motivated without the immediate gratification provided by the debt snowball method.
Now that we have explored both methods, it’s essential to understand that there is no one-size-fits-all answer when deciding between the debt snowball and debt avalanche methods. Ultimately, the “best” method depends on your unique financial circumstances, personality, and goals.
It’s worth mentioning that there is also a hybrid approach that combines elements of both methods. This approach involves prioritizing your debts based on both balance size and interest rates. By doing so, you can still benefit from the psychological boost of quick wins while also considering the long-term cost of interest.
To make an informed decision, evaluate your financial situation and consider factors such as the amount of debt you have, interest rates, your long-term financial goals, and your personal motivation style.
Remember, the most important aspect is taking action to address and eliminate your debt, regardless of the method you choose. Be consistent, disciplined, and seek support from financial professionals or resources to help you along the way.
Continue reading: Debt Snowball vs Debt Avalanche: Which is Better? – Part 1
?>
?>
?>
?>
?>