May 3, 2021
By Lindsey Smith
I am in debt.
How many of you can relate to that statement? Did reading it send a little chill down your spine as you remembered all the different payments you currently have to make each month? You’re not alone. In 2020, the average household debt in the United States was $148,298 dollars, with a total of $14.56 trillion across the nation.
With the added stresses and uncertainty of the past year, this situation has gotten worse for many Americans, 42% in fact. But this doesn’t have to be the moment where you give up and resign yourself to a life chained to debt. Whether it’s your credit card, student loans, medical bills, car financing, your mortgage, or a combination of these, you can make a financial plan to get yourself out of debt. It will take time and determination to stick to a budget and repayment plan, but it can work for you. If you get stuck, one of our friendly Availa Bank associates is only a phone call, email, or branch visit away from getting you the help you need!
Now, let’s get into the reason why you’re reading this blog in the first place: how to get rid of your debt.
The following two methods are called the debt avalanche and the debt snowball. They can technically be used for any kind of debt, but as you will see, each kind is better suited to certain types of debt than others.
What is the Debt Snowball Method?
If you’ve been spending a lot of time on the internet lately looking up budgeting tips and tricks, you’ve probably stumbled across articles promoting the debt snowball method, most likely on Dave Ramsey’s site. Dave Ramsey may have made this five-step approach popular, but it’s been around for a while and is supported by many financial experts.
How does the Debt Snowball Work?
This method works by paying off your smallest debt first, working your way up to the larger debts as time goes on.
There are five easy steps to this plan. To make sure that you can see the full repayment picture, you’ll most likely want to make a spreadsheet to keep track of your progress as you continue to pay off debts.
- First, list all your debts from smallest to largest in one column.
- In the next column, record the minimum monthly payment for each debt.
- Once this is done, pay the minimum amount due on each debt each month, then add any extra money you don’t have set aside for necessities to the smallest debt payment. For some people, this extra money equals $20-$50, for some, this is more like $100. Paying as much extra money as you can will really help you reach your goals in the long run.
- When you have finally paid off the smallest debt, add the amount you were paying on that debt to whatever the minimum payment is on the second smallest debt. You will then continue to pay the minimum amount on the rest of your debts.
- When you have paid off the second smallest debt, continue to repeat that pattern with the others, taking the amount you were paying on the smallest one and adding it on to the next smallest one until they’re all gone.
What are the Pros & Cons of the Snowball Method?
One big pro of the snowball method is the fact that it is psychologically proven to work. Paying off smaller balances leads to a quick win for your brain. This makes you feel better about yourself and more motivated to pay off the rest of your debt.
However, even if it’s a psychological win for you, this debt payoff method can end up costing you more money than other methods. For example, the smallest debts don’t always have the highest interest rates. You could be paying more in interest than you wanted to simply because you’re focused on paying off the smallest amounts first.
This debt payoff method is better for those who have low interest debts or for those who have struggled to stick to a debt payoff plan in the past because they feel overwhelmed by it all.
Ultimately, you will have to decide whether the little wins will motivate you more than any other debt payoff method or if you’re better off with a method that will effectively tackle your high interest rate debts.
Now that you’ve seen what the debt snowball can do, let’s take a look at the other major debt payoff method, the debt avalanche.
What is the Debt Avalanche?
The debt avalanche is a great option for people who have multiple high interest debts. Its focus is on each of your debt’s interest rates and follows the same pattern of payoff as the debt snowball.
How Does the Debt Avalanche Work?
The debt avalanche method is easy to follow. It starts off just like the debt snowball method, but in reverse.
- Instead of listing each debt by smallest to largest, you list them by highest to lowest interest.
- Next, make sure to list the minimum payment for each debt in the second column.
- After that, you start to pay off that highest interest debt, ensuring you continue to pay the minimum monthly amount on the other debts. Any extra money you have after minimum payments will be added to the payment of the highest interest debt.
- Once the highest interest debt is paid off, you add the amount you were paying on your first debt to the next highest interest one, along with all the extra money you can afford to add onto it.
- Keep following this pattern until all your debts are gone.
That’s it! You just continue with the next highest interest rate until all your debts are handled. If you struggle with credit card debt, student loans, medical bills, or car loans, this could be the perfect solution for you. These are often the debt categories with the highest interest rates that seem impossible to tackle, and where many Americans hold most of their debt.
What Are the Pros and Cons of the Debt Avalanche?
The debt avalanche is a tried-and-true method of getting out of debt quickly. If you find yourself with a lot of debt, you may find this is your best option to financial freedom. You’ll thank yourself later when you end up paying less in interest and are out of debt quicker than if you had stuck with your old plan.
However, it takes discipline and commitment to make this plan work for you. You will not see those small wins of paying off debts in just a few months, but instead over the course of many months or even years. This could affect your motivation and cause you to skip a few payments. This will ultimately hurt you.
You also have to be sure you have a set amount of income coming in each month. Any changes to bills or other cost of living expenses could put a huge dent in your plan and slow down your results. If you don’t have a steady income, it is still possible to make this plan work for you, however, you will have to be able to adjust your set payments at a moment’s notice.
So, Which Debt Repayment Method is the Best For Me?
Just like decisions related to your physical health are determined by your individual situation, so are decisions related to your financial health. While there are many tips and tricks that work for the majority of people, they aren’t guaranteed to work for everyone in the same way.
That being said, if you find yourself facing a lot of small debts with relatively low interest, it may be easier for you to use the debt snowball method, especially if you are more reward driven.
However, if you are facing large amounts of debt with high interest, like student loans, car loans, or credit card debt, you will probably be better off trying the debt avalanche method. You won’t have to pay as much in interest and your debt will be eliminated faster.
No matter what method you choose, it never hurts to talk to one of our experienced bankers about your debt situation to gain some good advice and insights. An Availa Bank associate is never more than a click, phone call, or short visit away.
Let us know which debt repayment method works best for you and stay tuned for next month’s blog where we tackle another tricky financial dilemma!
Availa Bank locations are in the following communities: Carroll, Ames, Ankeny, Arcadia, Coon Rapids, Council Bluffs, Fort Dodge, Holstein, Jewell, Nevada, Roland, Sioux City, Pocahontas, and Webster City. For more information about Availa Bank, visit the website at www.Availa.Bank and follow them on Facebook. Member FDIC.