As a financial advisor, I am often asked by clients to help them navigate the challenges of high-interest debt. A couple of popular methods are the debt avalanche and the debt snowball methods. Each method offers its own advantages. They tend to cater to different priorities and personalities. Let me break down how these strategies fundamentally work, who they may work best for, and what motivates their effectiveness.
The Debt Avalanche Method
This method focuses maximum effort on the debt with the highest interest rate, while continuing minimum payments on all other accounts. Once the top-rate debt is paid, you would redirect your freed-up cash to the next highest rate-debt, and repeat until all debt is paid.
Steps to Use the Avalanche Method:
- List out all your debts by highest to lowest interest rate.
- Make a minimum payment on all debts except the focused one.
- Pay as much extra as possible on the highest-rate debt in focus.
- Continually repeat the process until all debt is paid.
Why choose the Avalanche Method?
- This method saves the most money paid in interest over time.
- It can help you pay off debt more quickly, especially with high interest balances, like credit cards.
- This method can be best suited for clients focused on cost efficiency and long-term savings.
The Debt Snowball Method
The debt snowball method is all about picking off the smallest balances first, regardless of interest rate. You pay the minimums on all other accounts and put all extra funds towards your smallest debt balance. As each balance is eliminated, you move on to the next smallest balance, increasing your payment power-like a snowball gathering momentum.
Steps to Use the Snowball Method:
- List debts by balance, smallest to largest.
- Make minimum payments on all but the smallest debt.
- Attack the smallest balance with all extra cash until it is paid off.
- Move up the list to the next smallest every time you pay off a balance.
Why Choose the Snowball Method?
- This method can provide a psychological boost: Quick wins can fuel motivation.
- Ideal for keeping you from feeling overwhelmed-a sense of progress keeps morale high.
- This method may cost more in interest overall, but it can lead to better consistency for certain behavior patterns.
Which method should I choose?
- The avalanche method often works best for those highly motivated to save money and optimize efficiency.
- The snowball method is a strong fit for clients who like quick, visible progress to help stay committed.
Final Thoughts:
Both methods can be solid strategies for paying off debt. It can be most effective when you can be honest about matching your personality and financial priorities to the right approach, guiding yourself to lasting financial help. Try to automate payments to avoid lates fees and help to stay disciplined. If you have questions on which method might work best for you, reach out to me here, at Meikle Financial Group.
Securities offered through Cetera Wealth Services LLC, Member FINRA/SIPC. Investment advisory services offered through CWM, LLC, an SEC Registered Investment Advisor. Cetera is under separate ownership from any other named entity.
Cetera Wealth Services LLC exclusively provides investment products and services through its representatives. Although Cetera does not provide tax or legal advice, or supervise tax, accounting or legal services, Cetera representatives may offer these services through their independent outside business.
