Paying off a debt not only requires motivation or willpower, but also a method or strategy that makes it easier for us to fulfill our purpose. In this article, we suggest two of the best known methods: Snowball and Avalanche.

What does each strategy consist of, which one best suits your financial needs, personality and available budget? Continue reading.

SNOWBALL strategy to pay off debt

This strategy consists of paying off your smaller debts first and then liquidating the larger ones, which is why it is called that way.

This gives you fast results, which will motivate you to move forward in settling your commitments. By resolving your more affordable debts, you will have more money available, which you should then use on the rest of your debts.

Disadvantages

However, the main disadvantage of this strategy is that you will have to continue paying interest on the debts at the higher rates, which will help you save very little.

How to apply this strategy?

1.- Order or list your debts starting with the one that has the lowest amount, which is the one you will start with.

2.- Organize your budget, eliminate all unnecessary expenses and allocate this money to advance payments, make capital payments or pay a little more each month on the debt you will start with. In addition, you can look for options to generate extra income that will also help you pay, such as selling clothes or appliances that you no longer use.

3.- Continue paying your other debts, so as not to affect your credit history and to prevent late interest from accumulating.

4.- When you pay off your first debt in full, transfer the money you were allocating to pay off the next one on your list. For example, if you were paying $2000 a month on the debt you already paid off, that “leftover” money is transferred to the next debt, so you will pay faster.

This is how the “Snowball” method gets its name. By paying off the smaller debts, you have an increasing and progressive availability of income to face the larger debts.

How do I know if Snowball method is for me?

If you are a person who needs to see immediate results and thus maintain the motivation to pay off your debts, it is advisable to use the Snowball.

This strategy is also ideal if you have a limited budget and your income is not very high, as it will allow you to increase your cash flow, little by little.

AVALANCHE strategy to pay off debt

This is a method in which you start by paying off the debt with the highest interest rate, leaving the cheapest ones at the end.

By focusing on paying off the debt with the most expensive rate, the time it takes to pay off the debt in its entirety may be longer, so if you are a desperate person, you may get discouraged when you do not see immediate results, as in the previous strategy.

But, the main advantage it has is that it reduces interest payments and prevents them from growing in an uncontrolled manner, achieving great savings in your payments, which will be seen in the short and medium term.

How to apply this strategy?

1.- Organize your debts starting with the one that charges you the highest interest rate.

Tip: Credit cards are usually the debts with the highest interest rate. So if you are paying interest on your card, start paying off this debt.

2.- Organize your budget, eliminate all unnecessary expenses and allocate this money to advance payments, make capital payments or pay a little more each month on the debt you will start with. In addition, you can look for options to generate extra income that will also help you pay, such as selling clothes or appliances that you no longer use.

3.- Continue paying your other debts, this will prevent your credit history from being affected and prevent you from being charged late interest, which can make your debts unpayable.

4.- When you pay off the first debt you put on the list, transfer the amounts you used to pay off the next one. That is why this strategy is called “Avalanche”, because when you go from the most expensive debt to the cheapest, you will gain momentum and it will be less and less complicated to pay off the next due debt.

How do I know if Avalanche method is for me?

The Avalanche strategy demands patience, rationality and a cool head in order for you to notice its results. Therefore, if you are a calm person who does not usually despair when it comes to managing your finances and you have enough discipline to carry out time-consuming projects, this method is the most suitable for you.

In addition, this method is the most suitable for effectively reducing interest, so if you have several expensive debts and no longer want to pay so much, this strategy is for you.

Four things you should not repeat to fall into debt again

Once your debts are paid off, here are some mistakes you should never make again:

1.- Accepting loans and credits just because they are offered to you.

2.- Using your credit card as if it were an extension of your salary.

3.- Forgetting your payment deadlines.

4.- Not having emergency savings that would allow you to face debts in a calmer and less stressful way.

Author Bio:

I am Nikesh Mehta, owner and writer of this site.

I’m an analytics and digital marketing professional and also love writing on finance and technology industry during my spare time. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business. I can be reached at [email protected] or LinkedIn profile.