Which is the best method for paying down debt: Snowball or Avalanche?

Avalanche method recommends paying highest interest debt first, while snowball advocates smallest amount first.

Many of us have used our credit cards, cash advances and borrowed money over the holidays, shopped our way though the malls, ordered online and picked up gift cards for our friends, family, coworkers and picked up those little secret Santa gifts, all of this adding to the costs of the holidays. We purchased a turkey or ham, all of the trimmings, some spirits, made baked goods and bought boxes of chocolates.

Aside from the 5lbs you would like to lose, how many of us are going to be going on a debt diet over the next few months? Which is the best method to conquer those few debt pounds we plan to lose?

Blake Elyea, from our Vancouver office spoke to Canadian Press about some of his thoughts regarding the Avalanche method and the Snowball method, but which will work best for you?

‘Avalanche’ involves paying highest interest first

The avalanche method involves tackling the highest interest rate debts first — an approach that can save you money on interest payments, but may require more willpower if your highest-interest debts are also the largest ones.

“Mathematically that’s the best approach,” Elyea says. “However, you’re not going to see the instant results necessarily as quickly with that approach. It’s going to take more discipline.”

If you’re going to adopt the avalanche approach, you should be checking your balance and tracking progress and making a small budget to reward yourself when you reach your  short term goals.

‘Snowball’ method tackles small debt first

The snowball approach, popularized by U.S. radio and TV personality Dave Ramsey, involves tackling your debts from smallest to largest.

Knocking off the smallest balances first — while maintaining the minimum payments on all the other debts — gives the debtor some “quick wins,” making it a good approach for those who need to see some instant results in order to stay motivated, says Elyea.

“We all like instant gratification,” says Elyea. “We want to see that we’re making progress.”

It’s your choice

Although the avalanche method will save money on interest payments compared with the snowball technique, Elyea says any strategy that involves taking stock of your financial situation and actively tackling your debt load is a good one.

“If you have a structured way you’re going to approach your debt, either method is going to get you there,” says Elyea. “One might take you a bit longer than the other.”

If you are in a position where your debts feel overwhelming, one option might be to get a free consultation from a licensed trustee, not only can a trustee assist with helping you to plan and budget, but they may be able to offer additional debt reduction suggestions such as a  consumer proposal, an informal proposal to creditors, and, in certain situations to file for bankruptcy.

Whatever your financial situation may be after the holidays, if you feel financially hungover, there are options, take stock, develop a plan and reach out for help if needed.

Grant Thornton – Canada | We provide solutions for people with debt and financial challenges.

If you are facing financial struggles or would like some help with managing your debt—one of our professionals is available to discuss your situation. There are many options available, ask us about a consumer proposal. Contact us for a confidential, no-obligation, complimentary consultation. Call us toll free at 310 8888.

Excerpts adopted from the Canadian Press article: http://www.cbc.ca/news/business/debt-experts-recommend-avalanche-strategy-but-snowball-works-too-1.2886215

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