Thursday, 31 October 2019

How To Get Out Of Debt Fast - Debt Snowball vs Debt Avalanche

How To Get Out Of Debt Fast

In this article, I am going to teach you how to pay off debt using the debt snowball or the debt avalanche. These two different debt pay off methods have two different fundamental schools of thought, but they both get you to the quote-unquote promised land of being debt-free.

Let's Get Started


Debt Snowball: Pay Off Debts Smallest To Largest

If you've listened to Dave Ramsey, you may be familiar with the debt snowball. Essentially what the debt snowball is, is listing all of your debts in order from smallest to largest by dollar amount. 


  • Credit Card Debt: $1,200
  • Student Loans: $1,500
  • Auto Loan Debt: $2,000

Let's say, for example, you have a credit card that you owe, maybe $1,200, you have an auto loan that you owe $2,000 on, and then you have student loans that are $1,500

According to the debt snowball, what you would do is you would order this from smallest to largest regardless of the interest rate. What you're going to do with the debt snowball is, you're going to knock these out at a time while making minimum payments on the two higher debt

Let's just say that the percentage yield on the student loan is like 6%, the auto loan is 4.7%, and the credit card is 19%. 


  • Credit Card: 19%
  • Student Loan: 6%
  • Auto Loan: 4%

What you want to do is, regardless of the interest rate as I mentioned, you want to knock out credit card $1,200 debt as quickly as possible while maintaining minimum payments on an auto loan and student loan.

Once the credit card is knocked out, you're going to take what you were paying on the credit card and move it all toward whatever is second in line, in this case, it's going to be the Student Loans.


Builds Confidence To Tackle Higher Debts

Why does Dave Ramsy, and why do I recommend doing it this way. It's simply because it's psychological, and it's proven to work. That's how this debt snowball works and there are multiple studies that have proven that once you knock out your small debts first, those are like small psychological wins.

With that being said, let's use these same numbers and let's talk about the debt avalanche


Debt Avalanche: Pay Off Highes Interest Rates Debt First!

Let's say this person still has the same amount, the same percentages


  • Credit Card Debt: $1,200
  • Student Loans: $1,500
  • Auto Loan Debt: $2,000

  • Interest Rate

  • Credit Card: 19%
  • Student Loan: 6%
  • Auto Loan: 4.7%

However, what the debt avalanche talks about is that you want to pay off your highest interest rate debt first.

The reason for that is because mathematically, that's actually the most efficient way to do it. So let's take this same exact debt for example.


  • Credit Card: 19%
  • Student Loan: 6%
  • Auto Loan: 4.7%

What you would do is the same technique. You maintain minimum payments on the second and third debt or however many debts you have. While you try and absolutely just crush the first one which is Credit Card 19% interest rate and then you move on to the one with the second-highest interest, which is Student Loan at 6% interest rate. In this example, it comes out to be the same

No comments:

Post a Comment