Introduction
Given the state today of economic affairs around the country, the likelihood is high that most working Americans have some form of credit, including student loans, credit card debt, or a home mortgage. Paying this debt involves several types of approaches which need to be elaborated. There are two dominants approaches recognized today: the Debt Snowball and the Debt Avalanche. Although the concept is the same, meaning the disposal of economical capital to eliminate debts, both method applies unique approaches, time frame and procession psychology in its application. In this article, we will discuss these two in more detail so that you can understand which of the two are suitable for your needs.
The Debt Snowball Method
This is the Debt Snowball method, named by the famous personal finance specialist, Dave Ramsey. In this strategy, you prioritize your debts By committing yourself to pay as much as you can on the lowest balance till you eliminate it completely. This method is very much dependent on incentives and achievements in between the big picture.
Here’s how it works:
1. Accessibility: Cumbersome Amount Owed: Easy Maintenance: Easy Type of credit: installment Unsecured credit: No Term of credit: Revolving share of credit: High Credit granted: Easy Usual payment: Monthly Take necessary steps to create list of total debts to be made, current total credit card balances, total of installment loans, total of automobile loans, and total of all other loans.
2. First, make minimum payments on every card, but the one with the smallest balance. Pay any amount over the minimum to the smallest balance until it is gone.
3. The second procedure is to start paying off the next smallest debt, and continue the order, paying minimum payments on the other debts and apply the remaining amount to the new smallest debt.
4. Continue doing this until you are out of debt.
What makes the Debt Snowball method such a favourite is the psychology behind it. This way of managing ones credits helps to see the result, when large loans are supported by the pay offs of small credits. It can also maintain one’s focus and encourage him or her to stick to the plan in order to wipe out ones debt. Also, by paying minimum on the other balances, nothing is lost if anything goes wrong in the financial stead as you progress in paying off the lower balances.
The Debt Avalanche Method
The Debt Avalanche method as the name suggests is a mathematical approach of paying the dues. This strategy requires paying off the debt with the highest interest rate and only paying the minimum amount on all the other debts. In the long run, the amount of interest that you are charged is likely to be quite a lot less than that required by other providers.
Here’s how it works:
1. Take some time and write down all the debts you have and the amount of interest that is charged for each.
2. Sort the debts according to interest rate against the borrowing in decreasing order.
3. First pay down the minimum on all the credit cards and then put as much as you can toward the credit card with the highest interest rate.
4. After fully physically eliminating debt type 1, then eliminate debt type 2, then debt type 3, and so forth.
5. Continue to do this until you have paid all your debts.
Like any other debt repayment plan, the Debt Avalanche method will help you eliminate debts faster than if you do not have the plan, and therefore it is cheaper in the long run. Although this can’t be as psychologically uplifting as the frameworks of Debt Snowball method, this can be more effective and suitable for most of the people in the long run.
To decide which of the four methods of critical thinking currently available best suits you, you need to:
Which option out of the two is best, whether to use the debt snowball or the debt avalanche, is completely based on the circumstances, financial goals, and priorities. For those people who naturally look for immediate results and require certain psychological stimuli, the Debt Snowball method will prove to be helpful. This strategy is also perfect for individuals that find it hard to set a budget or those that need to change their ways of living if they are to clear their debts.
On the other hand, if you are value-oriented and you prioritise long-term gains, and you prefer taking a rather rational and more calculating approach to eliminating the debt, the Debt Avalanche may just be for you. It is also suitable for individuals with higher interest debts since it can help you cut on the interest amount in the long run.
Nonetheless, it is vital to ensure whether you go for either approach that you will follow and stick on your chosen course of action geared towards repaying the debts that you have incurred. This is also a good time to consult a financial advisor, to develop a strategy to attain your financial objectives.
Conclusion
Therefore, the use of Debt Snowball and Debt Avalanche has its moments and the technique can work in the case of paying off debts. The first one is based on the principles of achieving fast results and on psychological willingness, the second one is based on such principles as rationality and economy. If you are aware of advantages and disadvantage of both methods, you can decide on one that will be more suitable for your general financial condition and certain financial goals. Patience and rigorous practice, and no more debt to deal with, or no more financial slavery to slave for.
