Paying Down Debt: The Snowball vs. Avalanche Method
Got debt? Turns out a lot of Aussies do. In 2016, the country’s total personal debt totaled around $2 trillion with the average Australian household owing $250,000¹.
Suffice it to say, debt is a bugger to pay off.
It can also be a sensitive topic to discuss, and many people find it easier to brush it under the rug instead of actively working to fight it off.
“There are four things every person has more of than they know; sins, debt, years, and foes.” Persian Proverb
Well, we’re here to give you a little pep talk.
If you’re in a debt slump and struggling to make payments, there are a few debt-tackling strategies that you should know about.
We know, it’s not easy to get excited about debt repayment, but at the very least these snow-named-debt-tackling strategies may inspire a future Thredbo visit.
#1: The Snowball Method
What is it?
If you owe multiple debts, this strategy involves starting with the smallest balance first while paying the minimum amount on larger debts. Once the smallest debt is paid off, you move onto the next biggest, and so on, until your debt is completely paid down.
Start by making a list of all your debts in order from smallest balance to largest. Next, you must make a commitment to pay the minimum amount on every debt no matter what. This will ensure that you keep making progress across the board and don’t get bogged down.
Now attack your smallest debt with everything you’ve got. You might consider taking on a side hustle to earn additional income – but the idea is to focus all your energy on the smallest debt until it is completely paid off. Then move onto your next smallest debt.
Keep going until all your debts are paid off.
Why is it called ‘The Snowball Method’?
This method is about trying to create momentum, similar to a snowball rolling down a hill and garnering more speed and size as it goes.
Does it actually work?
It clearly takes psychology principles into account. Think about it. Small wins like making consistent payments give people a feeling of positive momentum, which encourages them not to give up.
According to Wikipedia, in a 2012 study by Northwestern’s Kellogg School of Management, researchers found that “consumers who tackle small balances first are likelier to eliminate their overall debt” than trying to pay off high interest rate balances first.²
#2: The Avalanche Method
What is it?
Similar to the snowball method, you make a list of your debts, but this time you’re organising them by interest rate. With this method, you prioritise your highest-interest debt, while making minimum payments on the rest of your debt until it is all paid off.
Again, start by making a list of your debts, but order them by highest interest rate to lowest. Pay the minimum off all debts but focus your energy on the highest-interest debts first. In theory you will save money in the long run by paying less interest.
Why is it called ‘The Avalanche Method’?
This method is about trying to create momentum, similar to an avalanche starting small and garnering more speed and power as you go.
Does it actually work?
This method takes a certain amount of discipline to be effective, which isn’t for everyone. If you’re able to make substantial payments while still having enough money for your daily living expenses, this can be a good way to help you get out of debt quicker.
Both methods require you to list your debts and prioritise them, whether it’s by balance or interest rate is up to you. Regardless of how you view these approaches, it never hurts to have a strategy to reach that debt-free life sooner.
If you want to simplify your debt payments, you may want to consider a Wisr debt consolidation loan. You can learn more about it here.