(Updated 10/17/2017) Snowball vs Avalanche is the most common method when getting out of debt. Let’s understand how the two differ from one another.
Nobody wants to be enslaved.
However, you are not financially free as long as you have outstanding debts that keep ballooning.
How do you pay off your debts, including your credit card bills? Would you pay them according to whoever gives you a call first? Do you pay the most consistent collector or pay blindly without any plans?
If you are juggling too many debts, you must seriously consider managing them successfully.
Do you remember how cartoons portray a rolling snowball catching up on a fictional character down the mountain? It starts small, and then it grows bigger and bigger.
The same goes for the Debt Snowball Method. Dave Ramsey, an American businessman and radio host, has popularised this method.
Why does it work? Because it has strong psychological power.
Aggressively paying the smallest amount first can give a psychological boost, and you can immediately cross out the debt. After crossing it out, you can use the extra cash to pay off the next debt on the list.
Seeing that you are finally making things work can give you a breather.
When using a Debt Snowball Calculator, you can easily manage your debt reduction. With these calculators, you have to enter the creditor or lender, the amount owed, interest rate, and payment amount per instalment.
The calculator will tell you how much the interests cost, the number of instalments payments left for each debt, and the total balance owed. This way, you can track your expenses in just a breeze.
If you have a car loan, do not include the monthly tax and insurance because you still have to pay for these long after paying off the car loan.
Some people like the Debt Avalanche Method more than the Debt Snowball Method.
This method prioritizes the highest interest rates first.
Since the highest interest rates will be the ones to be crossed out first, you can save on the interest charge. Here in Singapore, registered moneylenders have lower interest charges. The Monetary Authority of Singapore mandates moneylenders to have a statutory cap on interest rates. They can only charge up to 4% on unsecured loans, unlike ah long lenders who will charge skyrocketing interest on their victims.
While it seems more logical than the snowball method, the avalanche method will take more time before you can cross out debt on the list. It could take months, and you must not lose focus.
With an Avalanche Debt Reduction Calculator, you can quickly see how fast you can get out of debt. Of course, we know that getting out of debt is not easy, but having a plan and seeing how each payment can help you settle your debt can strengthen your determination.
If you prefer Google spreadsheet, you can get some versions for free. However, if you want a well-detailed calculator, you need to purchase it online.
From here, you can figure out how Snowball vs Avalanche works. Always assess your finances which is the best method to pay off your debts.
There is a chance that the method which works for a friend or relative will not fit you. We all have different financial circumstances.
Let’s say you want the avalanche method because the debt payment period is shorter, but you could easily lose focus. But then, it might not work because it could take some time before you can cross out debt on the list.
Also, you must not underestimate the psychological boost the snowball debt reduction strategy can bring. This method may take longer, but you can immediately cross out debts on the list.
In the end, both methods will work only if you focus on your goal: managing your finances freely.
You can even build a healthy credit score when you pay your loan on time. Everyone needs a loan. Even affluent entrepreneurs get a loan to keep their businesses thriving. Furthermore, it is advisable to regularly keep a credit not exceeding more than 20% of your total yearly income. Why?
If you do not have a good credit history, banks will have difficulty knowing if you are creditworthy. Skilful management of credits will take you a long way. You can get your loan approved, have a higher loan amount and even get a better deal than those with bad credit scores.
Do not be a slave to your debts forever. In fact, you should use it to your advantage!