Snowball, Avalanche or… Priority!?: Finding Consistency, Intentionality, and Purpose in Your Debt Repayment Strategy

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Choosing the right debt repayment strategy is more than just a financial decision—it's about consistency, intentionality, and purpose. If you've ever felt overwhelmed by multiple debts, you might wonder which method can best guide you towards financial freedom. Two very popular methods used to pay down debt are the Snowball Method or the Avalanche Method.

The Snowball Method encourages you to tackle your smallest debts first, giving you quick wins and a psychological boost that inspires you to keep going. On the other hand, the Avalanche Method focuses on paying off the highest-interest debts first, potentially saving you money in the long run but requiring more discipline. However there is a case to be made for starting your debt repayment stage of financial freedom with a focus on the most pressing debt first regardless of amount or interest rate. This can be a powerful motivator to keep you on track to reach Financial Independence.

As you reflect on your money mindset and personal goals, consider which method aligns more with your journey. Whether you're drawn to the momentum of the snowball or the efficiency of the avalanche, being intentional about your approach can transform your financial future. We’ll also explore how a combination of both strategies might be the best fit for you, ensuring your debt repayment plan is driven by consistency and purpose, creating a path that feels both manageable and sustainable.

Understanding the Debt Snowball Method

If you're confronting a mountain of debt, the Snowball Method can be your starting point to climb out of it. This method focuses on emotional wins to help you gain momentum.

How the Debt Snowball Method Works

To implement the Snowball Method, follow these steps:

1. List all your debts: Write down each debt you owe, from credit cards to student loans. Include the balance and minimum payment for each.
   

2. Rank debts from smallest to largest: Organize your list with the smallest debt at the top and the largest at the bottom, regardless of interest rates.

3. Continue making minimum payments: Pay the minimum amount on all your debts, except the smallest one.
   

4. Focus on the smallest debt: With any extra money you have, pay as much as you can towards this smallest debt.
   

5. Repeat the process: Once the smallest debt is paid off, move on to the next smallest debt using the additional funds you now free up. Continue this pattern until all debts are paid off.

One Key thing to remember, and it can't be overstated, is that once you have finished paying down that first debt the total amount of the money that is freed up in your budget will now pass on to be part of the minimum payment for your next debt.

Let's say you had 3 Debs:

• Debt 1 is $50 minimum/month - $400 total

• Debt 2 is $100 minimum/ month - $ 700 total

• Debt 3 is $125 minimum/ month - $1000 total

Now let's say that by applying a zero-based budget and identifying cost cutting on your expenses, you have freed up $150 a month that are not allocated to any category. You can now allocate this windfall to Debt #1. Your payments now will be as follows:

• Debt 1 is $50 + $150 minimum/month ($200) - $400 total

• Debt 2 is $100 minimum/ month - $ 700 total

• Debt 3 is $125 minimum/ month - $1000 total

This will make it so you pay down Debt #1 faster (2 months compared to the 8 months it would have taken with just paying the $50 minimum. When it's time for Debt #2 the difference is that now you have not just the $150 you were able to allocate to debt #1 originally, but the additional $50 you freed up by paying debt one off. Now your debt repayment looks like this:

• Debt 2 is $100 + $200 (50+150) minimum/ month ($300) - $ 500 total (remember, you were still paying this down while Debt #1 was finished up)

• Debt 3 is $125 minimum/ month - $750 total (remember, you were paying this down while Debt #1 was finished up)

Here is where the intentionality and purpose comes in: Your Budget has not changed! Your living expenses have not changed! The allocated amount to all your expense categories has not changed! You are still making the same amount in your salary. What has changed is the fact that you have an extra $200 (not $150) that can now be used to pay down the debt even faster still. When you pay Debt #2 down, you will have $300 (not $200) to crush Debt #3. In an additional 2 months (not the five that would have taken you to pay it down with just the minimum), your payments to Debt #3 would be:

Debt 3 is $125 + $300 minimum/ month ($450) - $500 total (remember, you were paying this down while Debt #2 was finished up)

When all is said and done, by applying this strategy, you would have paid off $2,100 in 6 months when it would have taken you 8 months by just paying the minimums. And it would free up $450 that now you can allocate to build up your emergency fund, or toward investment.

By starting with the smallest debt, you achieve quick wins. These victories keep you motivated and give you a sense of accomplishment, propelling you forward.

For more details, check out this guide by Ramsey Solutions on How the Debt Snowball Method Works.

Pros and Cons of the Snowball Method

While the Snowball Method has its advantages, it's essential to consider the downsides too. Here's a balanced view:

Pros

1. Quick Wins: Paying off smaller debts quickly boosts your confidence and motivation.

2. Psychological Boost: Each debt paid off provides a mental boost, reinforcing positive financial behaviors.

3. Simplification: With fewer debts to manage, your financial life becomes simpler and less stressful.

Cons

1. Higher Interest Costs: Since you're not focusing on interest rates, you may end up paying more in the long run.

2. Longer Payment Duration: Larger debts with high interest rates can take longer to pay off, extending your overall debt repayment period.

Consider your personal goals and mindset when choosing a strategy. If you thrive on small victories and need the motivation to keep going, the Snowball Method might be your best bet. However, keep in mind that another method might be more cost-effective if paying less interest is your primary concern.

Explore further insights on the Debt Snowball Strategy at Investopedia.

Understanding the Debt Avalanche Method

The Debt Avalanche Method is an intelligent strategy for paying down debt that targets the highest interest rates first. This method can save you a significant amount of money in the long run by reducing the total interest you pay. Here's how to use this powerful tool and what to consider as you incorporate it into your financial plan.

How the Debt Avalanche Method Works

Implementing the Debt Avalanche Method involves a few straightforward steps. Here's a step-by-step guide to get you started:

1. List All Your Debts: Begin by writing down all the debts you owe. This includes credit card balances, student loans, car loans, and any other forms of debt. Next to each debt, note the outstanding balance and the interest rate.
   
   

2. Order Debts by Interest Rate: Rank your debts based on their interest rates, placing the highest interest debt at the top of the list and the lowest at the bottom. The primary focus in this method is to tackle the highest interest rates first.
   
   

3. Continue Making Minimum Payments: It's crucial to maintain minimum payments on all your debts to avoid penalties and fees. This ensures that your accounts remain in good standing.
   
   

4. Focus on High-Interest Debt: Once you've ordered your debts, allocate any extra money towards the highest-interest debt. Pay as much as you can above the minimum required payment.
   
   

5. Repeat the Process: After eliminating the highest-interest debt, move your attention to the next one on the list. Continue using the freed-up funds from the paid-off debt towards the next high-interest debt, until all your debts are cleared.

As in the previous Snowball method, the Key factor is maintaining the minimum payments on all your debts as you progress through the order you establish. In this method your highest interest debt will always go first. This will usually be your Credit card (hovering at around 25-30%) then your car loan or student loans (7-12%) then mortgages (around 5-7%).

Mathematically this method is more effective than the debt snowball. By focusing on high-interest rates first, you reduce the total interest you'll pay over time, making this method highly effective for saving money.

Pros and Cons of the Avalanche Method

Before adopting the Debt Avalanche Method, it's essential to weigh its pros and cons. Let's break these down.

Pros

1. Interest Savings: By targeting the highest interest rates first, you minimize the total interest paid over time. This can result in substantial savings.
   

2. Faster Debt Reduction: Since high-interest debts accumulate more interest, paying them off quickly reduces the overall time you remain in debt.
   

3. Logical Approach: This method is driven by financial logic rather than emotional motivation. If numbers and savings motivate you, this method aligns perfectly with that mindset.

Cons

1. Delayed Gratification: Initial progress might feel slow because you're tackling larger, higher-interest debts first. This can sometimes diminish motivation. If the highest interest debt is also a large amount, it will by its nature take longer to pay down. This could lead to you feeling like there is no improvement in your journey and can stop your momentum very quickly.
   

2. Requires Discipline: The method demands consistent focus and financial discipline to keep up with payments on high-interest debts without getting sidetracked. Staying determined knowing it will take longer is imperative to applying this method.
   

3. Complex for Some: Managing multiple debts with varying interest rates can be complex and overwhelming, particularly if you're not used to detailed financial tracking.
   
   

Adopting the Debt Avalanche Method can provide significant benefits by reducing the interest you pay and potentially shortening the debt repayment period. However, it's essential to stay motivated and disciplined, recognizing that while the upfront progress might seem slow, the long-term payoff is worthwhile.

For more insights, check out this comprehensive guide on the Debt Avalanche Method by LendingTree and understand the pros and cons detailed in Forbes.

A Third Way: The Priority Method

When it comes to tackling debt, both the Snowball and Avalanche methods have their merits. However, there's another approach that could be the perfect blend of both: the Priority Method. This is what I personally used in my own debt freedom journey.

This strategy involves focusing on the debt that most significantly impacts your financial or emotional well-being. By prioritizing what weighs you down the most, you can craft a more personalized and effective repayment plan.

When I started listing out my debts I started with the debt snowball and started listing them smaller to largest. My total debt included a car loan and 6 different private school loans as well as two federal loans. For the federal loans I used a program called Public Service Loan Forgiveness. The private school loan however, I paid by prioritizing which loans were more important to me to get rid of first. 3 of the 6 loans had a cosigner attached to them. Although it made sense to start with the smallest to get the ball rolling, I started with the third in the ranking.

It was imperative to me that I rid myself of those 3 loans first for 2 reasons:

1. I wasn't going to let my burden affect others.

2. That person that cosigned the loan was no longer a part of my life so I didn't want to keep dragging that responsibility on and on.

I rearranged my loan ranking and tackled those 3 loans first and stacked the last 3 in Avalanche order. This allowed me to stay focused on "My WHY". That gave me the drive to keep going and eventually give a call to that person to let them know I fulfilled my financial responsibility and closed that chapter of my life for good.

Factors to Consider

Choosing the right debt to prioritize requires some thoughtful consideration. Here are key factors to analyze:

• Interest Rates and Amounts: Just like in the Avalanche Method, high-interest debts accumulate faster. However, mixing this with prioritizing certain emotional burdens can provide a balanced approach.
  

• Psychological Impact: Which debt keeps you up at night? Maybe it's not the one with the highest interest but the one that triggers the most stress. Prioritizing these can provide emotional relief.
  

• Financial Security: If a particular debt, like a car loan, threatens your means of transportation or employment, it might need to be tackled first. Similarly, falling behind on rent or mortgage can have immediate consequences on your living situation.
  

These considerations help personalize your repayment journey, offering a strategy that's both financially smart and emotionally satisfying.

Using this hybrid approach can give the benefits of both the Snowball and Avalanche methods. It helps maintain the motivation from quick wins while reducing the overall interest accrued. This way, your strategy is driven by consistency and intentionality, balancing cost-effectiveness with mental relief.

Links to Sources

Understanding the differences between the Snowball Method and the Avalanche Method, as well as their pros and cons, can help you decide which debt repayment strategy suits you best. Below are some valuable sources that offer in-depth information and comparisons.

Credible Sources for Debt Repayment Strategies

For a thorough understanding, take a look at these articles that explain how each method works and their benefits:

• Debt Avalanche vs. Debt Snowball: What's the Difference? - Investopedia
  This article delves into the mechanics of both methods, explaining how the debt avalanche focuses on high-interest debts, while the debt snowball targets the smallest debts first.

• Debt snowball method vs. debt avalanche method - Fidelity
  Here, Fidelity compares both methods, highlighting the potential cost savings and psychological impacts of each approach.

• Debt Snowball vs. Debt Avalanche: What's the Difference? - CNBC
  CNBC's article provides insights into which method may be more beneficial depending on your financial goals and debt situation.

• Debt Snowball vs. Avalanche: What Loans to Pay off First - Discover
  Discover's resource helps you decide which debts to prioritize, breaking down the steps for each method.

Final Thoughts…

Choosing between the Snowball Method and the Avalanche Method comes down to your financial goals and personal circumstances. The Snowball Method offers rapid psychological wins by eliminating smaller debts first, boosting motivation. The Avalanche Method, while requiring more discipline, saves you more money in the long run by addressing high-interest debts first.

Reflect on what drives you—whether it’s the satisfaction of crossing off smaller debts or the long-term savings from cutting down interest rates. Also, consider blending both strategies to suit your needs. Tailoring your approach ensures consistency, intentionality, and purpose in your debt repayment journey.

Ultimately, the best strategy is the one that aligns with your financial mindset and keeps you on track towards debt freedom.