Many people end up in debt at one point or another. This could be through student loans, credit card, or car loans. The goal is to get rid of all debt, so that you can invest with success and eliminate any fears you may have about money.

If you have multiple debts and you don't have enough cash to pay them all at once, which one should be paid first? Two main strategies are recommended for getting out of debt: the "debt avalanche" method and the "debt snowball" method. We will discuss them in this article and help you decide which one is right for you.

What's the debt avalanche technique?

An avalanche approach to debt payment is making minimum payments on all debts you owe. The highest interest rate debt gets any money left over for debt repayments. Once you have paid off the debt in full, you can then use that monthly extra to pay off the next highest-interest loan. Continue this process until all your debts are paid.

A sample of the debt avalanche technique

This example will help you understand how the debt avalanche system works. Let's suppose you have three debts that you are trying to pay off: a student loans, an auto loan and a credit card. Each has a unique balance, an annual percentage interest rate, and a minimum monthly payment. Here is a breakdown of the information:

• The student loan is a $30,000 abalance with an APR at 5.95% and a $550 monthly payment.
• The auto loan has an outstanding balance of $10,000, an APR at 3.99% and a monthly payment in the amount of $400.
• The credit cards have a balance $8,000, an APR 14% and a $200 monthly payment.

Let's suppose you have $350 extra each month to pay your debts. This would mean that you would use the $350 to pay off your credit card balance. After you have paid off the first debt, you can move on to the student loan. This is the debt with the highest interest rate.

The pros and cons of the debt-avalanche method

You can determine if the debt avalanche approach is right for you by understanding the benefits and drawbacks. These are the pros:

• Saving money:By paying off high interest debts first, the debt-avalanche strategy allows you to make long-term savings. High-interest debts can be eliminated before they become too burdensome.
• Economic: The debt avalanche technique can reduce the time it takes you to pay off your debts. You can reduce your debt by focusing on high-interest loans first, and then paying them off as soon as possible. This will prevent it from growing.

There are, however, some drawbacks. These are:

• It takes discipline: To successfully implement the debt-avalanche method, it requires a lot of commitment. You won't get the immediate satisfaction that comes with the debt-snowball method. This allows you to cross off the smallest debt first (more details below).
• You might find yourself working on one debt for a long time, instead of tackling your smaller debts. It can be demoralizing compared to the quick win that you get by paying off the smallest debt first.

What's the debt snowball technique?

The avalanche method is focused on the debt with high interest rates, while the snowball method targets debt with low balances. This method requires you to make monthly minimum payments on all debts you owe. Any money left over for debt repayments goes to the smallest debt (rather than the one with the highest interest rate).

This logic suggests that you will be able to pay off this debt faster than others. You'll gain momentum and motivation! As you pay down your debts, the momentum will build. After you have paid off your first debt, you can move on to the next one with the lowest balance. This does not apply to mortgages.

A sample of the debt snowball technique

Let's suppose you have three debts that you are trying to pay: a personal loan, two credit card debts and a personal loan. Each has its own balance and APR. Also, each one must pay a minimum monthly payment. We won't be focusing on interest rates in the debt snowball model as they don't affect the amount of debt. Instead, we will focus only on the minimum and balance. Here's a quick overview:

• The personal loan comes with a balance in the amount of $10,000 and a $250 monthly payment.
• No. 1 Credit Card Credit card No. 1 has a balance in excess of $5,000 and a minimum monthly payment of $60
• Credit card no. Credit card No. 2 has a balance $12,000 and a monthly repayment of $170

Let's suppose you still have $320 to pay your monthly debts. You would use that $320 to pay off credit card No. The smallest balance is number 1. After that, you can move on to the next small debt, the personal loan.

The debt snowball method: Pros and Cons

When deciding which debt repayment method to use, the snowball method comes with its own set of advantages and disadvantages. These are the advantages:

• Motivational Managing multiple debts can seem overwhelming. It can be a great way to have peace of mind by reducing your IOUs. You'll be more motivated to pay off the next debt if you have paid off the smallest first.
• The snowball method is very simple to implement. Variable rates don't require you to keep track of changes or look at APRs. It's easy to simply assess each debt's balance, and then structure your payments accordingly.
• Confidence-boosting:Debt is a daunting task. It can boost your confidence to know that you have successfully paid off one debt. This is a positive sign in smart money management.

However, there are some drawbacks to the debt snowball approach:

• Higher interest rates over time: If you concentrate on debt balances rather than interest rates, there is a risk that high-interest debts will grow. You may pay more in the long-term.
• Inefficient In the end, the snowball approach may require you to take longer to pay off all your debts. If you have large debts that carry high interest rates, this can occur. Your debts will continue to grow and accrue interest. You should instead focus on smaller debts.

What's the major difference between the debt snowball and the debt avalanche methods?

Both the debt avalanche (or snowball) methods require that you pay at least one monthly payment for all your debts. The difference is in which debt you should pay after these minimums have been met. The debt avalanche method involves paying off debt at the highest interest rate. While the debt snowball method requires you to pay off debt with the lowest balance.

What method should you choose?

Which debt repayment strategy is the best? It might surprise you to find that there isn't one right answer. Mathematically, it might seem that the debt avalanche approach is superior because it can save you money on interest as well as increase your chances of becoming debt-free sooner.

But, paying off all your creditors is more than just having the money. It's also about the psychological aspect of the game. This is where the snowball strategy comes in handy. This debt reduction strategy can help you quickly pay off the smallest debts. It can also be very motivating and give you the push you need to keep pursuing your payoff strategy.

Psychology is key to reducing debt. Smart money management is essentially about psychology. Take budgeting, for example. You'll likely end up breaking your budget if you feel like you are constantly restricting your life because of it. For most people, a life that is constantly saying "no," is not sustainable.

If you create a conscious spending program, and allow yourself to indulge in your favorite pastimes guilt-free, you will be more likely to follow it. Money management success is all about understanding your money dials, the things that you are most excited about spending money on and then allowing yourself to indulge in those pleasures without guilt.

It is important to understand your own mentality when choosing a repayment plan. You should try the avalanche approach if you are determined enough. If you find it difficult, you can try the snowball debt repayment method. Either strategy will help you get out of debt and improve your credit score. You can also consolidate debt to reduce your debt.

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