Over the years, I have had the opportunity to work with millennials and young people who feel overwhelmed by debt. Whether it was student loans, credit cards, or other debt, it was clear they were struggling. Many young people have been dealt with the pressures of high education costs, massive student loans, and uncertain job markets after college.
There are two popular debt reduction methods that can help: the debt snowball and the debt avalanche. Let’s see how each works and break down their pros and cons.
Debt Snowball Method
The debt snowball method was popularized by financial personality Dave Ramsey. The idea is to pay off your smallest debts first while making minimum payments on your larger debts.
Once you’ve paid off your smallest debt, you apply the same payment amount to the next smallest debt, and so on.
This basically creates a “snowball” effect, where you pay off smaller debts one by one until they’re all paid down.
The Pros:
1. By paying off small debts first, you see your progress, which can be motivating and help you stay on track.
2. This method is easier to stick to because you’re focusing on one debt at a time rather than trying to tackle them all at once.
The Cons:
1. It takes longer to make a significant dent in your larger debts.
2. By paying off debts with lower interest rates first, you’ll end up paying more in interest overall.
Debt Avalanche Method
The debt avalanche method is another method where you pay off debts in order of their interest rates rather than by their balance.
This means you’ll focus on the debts with the highest interest rate first and make minimum payments on the others.
The Pros:
1. This method makes the most efficient use of your money since you’ll be saving the most in interest payments over time and potentially saving thousands of dollars.
The Cons:
1. It will likely take longer to see progress, so you could get discouraged.
Which is Better?
So how do you decide which is better? The answer is that it really depends on your own financial situation and personal preferences.
If you’re looking for quick wins and motivation, the debt snowball method is the way to go. If you want to make the most efficient use of your money and spend less on interest payments, the debt avalanche method is the clear winner.
From my experience with people who’ve used the debt avalanche method, they found it to be more satisfying because they could clearly see the progress they were making.
Whichever method you choose, the key is consistency and discipline, just like anything worthwhile in life.
