Snowball Versus Avalanche

Recently, we shared our perspective on the first baby step. As you might have guessed, we aren’t in lockstep with Dave on Step 2 either. While we agree that, after having enough saved up for an emergency, tackling debt is the next logical step, we’re not rigid adherents to the debt snowball process. If you are reading this post, it’s probably safe to assume you have heard this term numerous times but, just to be sure, the process is to pay off your debts working from the smallest balance to the largest.

First things first. If you owe the government any money, you should strongly consider taking care of this first and as soon as possible. Owing the government is not something to be taken lightly as any government — be it federal, state or local — has the power to completely alter your life, and in some cases destroy it. Clearly, this is priority one. To be clear, it may not be necessary to get such liabilities paid in full immediately (i.e. you may be able to work out a payment plan), you definitely want to never miss a payment, especially if you’ve worked out a special plan.

The main focus of the debt snowball method seems to be getting quick wins to build psychological momentum and, thus, maintaining and even increasing motivation to stay the course. It makes good use of typical human reward responses to help you stay the course and ensure you hit the ultimate goal, which is to get rid of your debt. We certainly understand that, for many, the size of your debt, the number creditors you have, and other factors can make attacking your debt daunting, to say the least.

The debt snowball is a very good way to pay off debt because, first and foremost, it gives you a plan. As Dwight D. Eisenhower said, “In preparing for battle, I have always found that plans are useless but planning is indispensable”. When attacking your debt, you are most certainly entering battle, and one should never do so without a plan. As with many things in life, however, not all plans are equal; even though the snowball is good, it’s not necessarily the best for everyone.

Having made the decision to conquer your debt, it’s worth taking a few minutes for reflection to consider what approach best suits you. Whether you want to see your number of debts shrink more quickly (think snowball) or would prefer to maximize your savings and reduce your overall time to final payoff, as you would by paying off the highest interest debts first. We actually ended up doing a combination of the two. We knocked out a few smaller debts first and, having built some confidence in our commitment, switched to knocking out the highest interest debt first from the remaining accounts.

Now, you might think that working out all the differences between the various ways you can accelerate your debt payoff might involve a lot of complicated calculations you don’t want to do, and you’d be right. Fortunately, there are tools out there to help you work through the numbers. We found one that lets you compare payoff approaches. Just enter data about your debts, select a payoff order, then click calculate. You’ll not only see your savings vs. your current payment pattern, but how long it will take to pay off your debt using the selected method. To compare methods, just choose a different one and click “calculate” again.

Regardless of your plan, or your eventual path, paying off debt can be a very long road and may feel lonely at times; it’s okay to budget a little fun money each month so you can enjoy yourself some along the way.

As always, we’re interested to hear from you. Tell us about your journey and how you’re attacking your debt. Have you had to deviate from plan? Do you have any tips of your own to share?

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