When it comes to paying down debt fast, there are generally two different approaches to take, these are called the snowball or avalanche methods with each having its pros and cons.
Let me be clear before I go any further, there is no right or wrong answer when it comes to which method is best because every person’s debt situation differs. Sometimes it might even be a combination of both methods. It is up to you to determine what motivates you and which process may be the best fit for your situation.
So let’s go over each of them;
The “snowball method,” means paying off the smallest of all your loans as quickly as possible. Once that debt is paid, you take the money you were putting toward that payment and roll it onto the next-smallest debt owed. Ideally, this process would continue until all accounts are paid off. As you roll the money used from the smallest balance to the next on your list, the amount “snowballs” and gets larger and larger and the rate of the debt that is reduced is accelerated. I have personally used this method and found it highly achievable and easy to follow.
In contrast, the “avalanche method” focuses on paying the loan with the highest interest rate loans first. Similar to the “snowball method,” when the higher-interest debt is paid off, you put that money toward the account with the next highest interest rate and so on, until you are done. Focusing on the loans that are the most expensive to carry, in the long run, would effectively mean you should pay less over time with this method, as it addresses high interest first.
Whatever your chosen debt reduction strategy, remember to stay focused on your end goal.
- With the “snowball method,” you will build momentum and enjoy those little wins to use as motivation to keep going.
- With the “avalanche method,” it may take longer to roll over to your next account but if you have larger balances with higher interest rates and you stick to the plan, it should save you in the long run.
Either way, it will take time, but the important thing to remember is to commit to a goal and stay with it. By staying focused on your end goal which may be to buy your own home, and in this case not adding unnecessary new debts, your existing debts will slowly disappear, which helps your borrowing power for a home loan.
If you would like to discuss your personal situation and figure out which one of these two debt repayment methods suits you and what you are trying to achieve please reach out to me or any of the Inspired Money Team and we would love to help you work toward achieving financial freedom.
Article is an original piece written by Darrel Roberts, Head of Lending Services at Inspired Money.