Debt Snowball Vs Debt Avalanche | Which is the Best Debt Payoff Strategy?
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- Опубликовано: 25 янв 2018
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Ah, the great debate. The debt snowball vs debt avalanche. These are the two most common answers that financial advisers give when asked how to pay off debt. But is one of them really better than the other? As a financial education channel I was determined to put it to the test. In this video I reveal my findings.
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For what it's worth - I believe your math is incorrect for the snowball method. The total time to pay off the full debt in the real world using these numbers would be 30 months and it would cost ~$7362.17 in interest. I think where you went wrong is assuming that the balances of the debts remained the same while you were paying off one debt. This is incorrect. For example - if you were making $750 payments to the credit card for 23 months (as required seeing how that's the minimum) while you were paying down the other debts, by the time you started adding extra to the payment in month 24 - the balance would only be ~$12817.79. I don't understand why you calculated the numbers this way when in reality, the balances change while you're making payments.
There are people out there who need a plan regardless if they're doing snowball or avalanche, but this may mislead people in how to carry out the plan or which to pick.
Looking back at my notes I see that you are correct. I made an honest mistake by putting the wrong balance in for each new debt with both methods. Outside of admitting my mistake in the comments I'm not entirely sure what I can do. I will pin this to the top of the comments so that everyone can see it. Hopefully then at least they will know that the math in the videos example is a bit off even though the concepts behind the methods remains the same (the avalanche pays all the debts quicker and with less interest but may take a little longer to get rid of some of the bills coming in the mail every month then it would with the snowball method). My hope is that despite my mistake with the math people can focus on the concepts and pick out which plan will work best for them. Thanks for catching my mistake ☺️.
Next Level Life you should factor in the fact that in most cases people who would utilize 25000 on one credit card would most likely have multiple other cards used with a balance. Odds are they would have one card around 5k another around 7500 and a third card with 12500. This would drastically change the outcome of both events
Next Level Life Thank you for your clear and thoughtful video. It is a shame the errors make it less credible. You may want to look into edits you can make to the video. I have seen many RUclips videos that use pop-up information cards that RUclips provides in order to point out any factual errors. Even though I think your video's message overall is correct, which is that the avalanche method is mathematically better but it will depend on your personality which method will be more successful for you (and research shows in general this is the snowball method), I still think the numbers are misleading. Even in trying to make this scenario as extreme as possible, in reality your two scenarios are only a month apart in paying off the debt. Factoring in any other steps (e.g., spending less on food or entertainment) one may take once they see that they can pay off 10,000 dollars worth of debt in 9 months may even it out entirely (although I don't think you should account for that unless there is scientific evidence showing that people are indeed motivated by the debt snowball in this way). Also the amount of interest paid should be corrected to make it realistic. From my calculation John would be paying closer to 6000, making the actual financial costs of this method (that probably feels better) significantly less.
Next Level Life i still enjoyed the video. Thank you
Ahmbur Blue
😂😂🤦🏻♂️
First off, the belief that the Federal Reserve would stop raising interest rates was the driving force behind the entire economic chaos. What should we do now that we have a situation where interest rates are crashing? At this point, how would you suggest that I safely allocate $300k?
Although the market is currently volatile, aren't the current valuations a result of the Federal Reserve's monetary policy and low interest rates? Therefore, my recommendation is that you consult a financial advisor who can give you entry and exit points for the shares or ETF that you are interested in.
Agreed, my portfolio is well-matched for every market season yielding 85% from early last year to date. I and my CFP are working on a 7 figure ballpark goal, tho this could take another year. IMO, financial advisors are the most sought-after professionals after doctors.
How can I participate in this? I sincerely aspire to establish a secure financlal future and am eager to participate. Who is the driving force behind your success?
“Sharon Lee Peoples” is a leading asset-manager in the industry. You should take a closer look on her page.
Her name is “Sharon Lee Peoples” can't divulge much. Most likely, the internet should have her basic info, you can research if you like
Debt free is the new rich
Love it!
AMEN!!! Great statement....
vendogg I am living my best life
Which actually isn’t cool.
Even if not in debt , it doesn’t improve your quality of life much if there aren’t competitive wages.
Wealth should be achievable. Achievable independently.
Modern life should Not be akin to a modern day “indentured serf”.
There are now billionaires saying this is economic injustice. But we just don’t listen.
I do feel like “a serf”. Corps have outrooted salary competition, and yet we’re told to only look at ourselves. We’ve done that. And the numbers make it clear that education costs have gotten out of hand, out of affordability, and hardly increase wages anymore, except a few fields.
If the sage advice is to keep you in the mind frame of a child your whole adult life - “live with nothing, sell everything and move back with your parents” - what will you look back on? Really .
The ones “running this show” are hoarding cash for their future generations so their own families don’t go through OUR struggle.
Chairmen and “investors” (the board members) feel entitled to reap all the rewards and we just keep eating the bs.
We’ve voted away unions, pensions, affordable tuition for what?? To say “debt free is the new rich”.
No millionaires aren’t even rich anymore - that’s how precarious it’s become for ourselves.
They want to vote out social security and take medical care back to. This country’s youth needs a backbone.
(Not an attack on your words - I’m just livid about this situation I’m our country )
A Pove if you have food, clothes, and a place to sleep, you are richer than 75% of the world
Plot twist: my lowest bill have the highest interest rate so essentially I’m doing both simultaneously.
Same here. I have only one debt-a low balance with high interest so as I gain more income over time, I take progressively bigger swings at it with larger payments. I cannot wait to be debt-free, and only have to deal with monthly expenses like utilities, food, and car insurance. Peace of mind is worth the extra effort!
When your lowest debt is your highest interest.... Win win 🤷♂️🤔
@Zed Reno you would be doing the snowball and avalanche at the same time
@Zed Reno it's a win/win in picking a strategy to get out of debt...
Same here
And the Mic drops....boom!
I personally am using a blend. I used the snowball to pay off all my small debts (under $1K) and then switched to avalanche. This got me into the habit of paying things down and simplified what were a lot of debts into just a few and now I can tackle the high interest stuff more clearly.
An excellent strategy!
Yeah that is smart.
Ah, the Chinua Achebe method!
(I think i spelled it right)
In the book Things Fall Apart, the guy's dad explains with, i think, shells. He has shells laid out to illustrate his many many debts to his fellow villagers. His son was going, pay off the biggest one first so you don't have to worry about it! Dad says no, you pay off all these smaller ones quickly so more villagers are happy and more likely to re-lend to me!
(I think i remembered it properly lol)
Talk about a DUH moment ... never thought about that. Thanks for pointing that out. Will re-plan to account for that as I just started the snowball method.
This is exactly what I'm working on! I want to get rid of my smaller ($1k-$2k) debts first before tackling my biggest ($36k)... phew, student loans are a headache!
“Selling so many things that the kids think they’re next!” I have no idea why I found that so funny, but it made my day
That's Dave Ramsey's quote. You should watch him, he's great
@John Lester Lol! And remember! You do not step foot inside a restaurant unless you're working there! :D
Dave also says to cut up all of your credit cards! Don't use them!
Now, for any doubters, or perhaps those who do not even know of Dave Ramsey. . .
He has Millions of individual success stories, proving that his method works.
More Ramsey quotes:
"We buy things we don't need, with money we don't have, to impress people we don't like."
"Your decisions from today forward will affect not only your life, but also your entire legacy."
"Pray like it all depends on God, but work like it all depends on you."
"Gazelle intent!"
"Beans and Rice!"
"Act your wage."
Kids generally become the largest liability and expense item on the budget, so it's understandable if they get a bit nervous...
Live like no one else now, so you can live like no one else later.
They are both right if you ACTUALLY DO THEM. The key is to get out of debt.
You just gotta do it smart
True!
But correct is not the same as most efficient and cost effective.
@@bellajaid - and the most effecient/cost effective option is not the most practicable depending on the number of debts
😂😂😂
The debt snowball helped my husband and I pay off 300k of debt in 3 years. We are now on our way to being millionaires with a paid off house by 35. It definetly works!
Wow! 300k in 3 years? That's quite impressive, great job 😃!
@@NextLevelLife Thank you! It tool a lot of sacrificing and a lot of work but it was definetly worth it. Great video keep it up!😊
cap
Awesome
Congratulations 🎉
I hope you and your family are flourishing and prosperous
The debt snow ball is mentally better not mathematically and Dave Ramsey says that all the time.
Miss Deane psychologically, for those who don’t think logically mathematical
basically nobody thinks logically mathematical.
He also says the person paying off the highest interest debts first are idiots. (just heard that today in one of his videos) The name calling and sometimes childish remarks from him in my first impressions are a turn off. (I'm new to learning about debt) There are plenty of folks on RUclips with resourceful channels and from my experience, people who attack/dismiss other strategies either are insecure of their own or have a bigger agenda.
Dorjee Gyadatsang They are because studies show that it is more mental than mathematical. If it is so mathematically genius and obvious to pay off the highest interest rate loan first, then that person would never have had that loan with that high interest rate in the first place. Getting into debt is not mathmatically smart, rendering the idea that paying off the debt based off of mathmatics...idiotic.
I would say most people are emotional spenders, hence the debt. So the snowball effect, backed by research, plays a safe and very effective way to attack debt, and increase motivation along the way.
My buddy that is a marine always told me that if you focus on putting on foot in front of the other, you'll get a lot farther than focusing on how far you have to. It's all about the little victories.
Dave is a little rough around the edges sometimes but it earns him more viewership than it loses. He does that because...well, he's a logical thinker. Granted, most of his viewers/listeners are not the logical types and are in over their heads. He's not trying to save them the most money in interest, he's just trying to save them. He even freely admits when he gets one of those callers who, for example, claims their rewards are worth having their credit card, and that they pay it off monthly, that they are not really his target audience.
Just sent the bank a check to pay my car off in full! My wife and I are truly debt free for the first time in our married life. We just sold our house about 4 months ago and are currently apartment dwellers. Yes, the rent is like having a mortgage payment, but it’s not a debt! I can remember a time where we were making over six figures and still couldn’t pay all our bills in a given month. Now we have a net cash flow of approximately $3500 monthly after all bills/expenses. DEBT is the biggest barrier to building wealth.
Great work, Aero! Paying off that amount of debt is a major accomplishment and will have hugely positive effects for your financial life for years to come. Obviously you're already seeing that with your cash flow 😉. Now you can start building some serious wealth quickly. Keep up the good work!
Great job!!! We are almost there too. By March 30, if all goes smooth! We started last May during the pandemic,,, what a ride...
CONGRATULATIONS!!! 🙌🏽😺👊🏾
@@denisegarduno5835 - you’ll get there. Just keep plugging away with the same intensity as you have been over the last year. There is no better feeling than having the cash to do what you want to do because DEBT is out of your life.
Amen!
If people did what was mathematically practical, almost no one would go into debt
9:27 The flip side is true as well. If people did what was mentally/psychologically practical, they could also avoid debt, which can end up being just as emotionally controlling as it is mathematically, and can be CAUSED by either.
@@jaketyler7088 Psychologically we give more value to now and here than to the future, so no, nobody who's about to comfort themselves with binge eating today is gonna stop because of a thought that if they refuse themselves they will feel better tomorrow and within a month. Psychology is not maths.
@@6Oko6Demona6 Overall, I would have to disagree. I believe there are plenty of people out there who have the self-control to resist your binge eating example. Sure we give more value to the present like you said (self-gratification), but that doesn't mean we can't control ourselves. How many times have you talked yourself out of an impulse purchase? My argument above basically describes self-control and discipline.
@@jaketyler7088 you're basically agreeing. BTW instant gratification gave us an evolutionary advantage so it's not really that easy to overcome. And yes some people are better at controlling themselves, some are worse, to some extent one can train that ability. Maybe overeating, impulse buying are the symptoms of some disease or sth like that but people do that because that's what makes the most sense to them at the moment- psychologically.
Shots fired!! 😂
I think a mix of the two is best.
Start with the smaller one for a quick win.
Once you have momentum go to the bigest interest debt and switch to avalance.
It's amazing how mentally freeing it is to even knock out two small cards. Just not having them in your head. You'd think it wouldn't make much difference but it's like playing a FPS video game - kill two enemies and you are much more motivated to attack the third with full gusto.
Harvard Business Review and Kellogg School of Management both recommend the debt snowball. Avalanche works better in theory as Dave Ramsey admits. But in reality, behavior trumps math.
For the vast majority of people I would say that this is true!
Yep and behavior is the reason one is probably in that much debt in the first place so it's best to find a way to modify behavior
Yeah, I’ve been using the snowball. It works, I don’t think of the larger monster, I defeat the minions and focus on the boss last
@@justshady Excellent way of putting it!!
As Dave says "If it was simply a math problem, you wouldn't be in debt"
I am following the Debt Avalanche and I get a great emotional benefit in seeing my interest each month in those high-interest accounts drop. They are also my highest payment accounts, so when they are paid off, the smaller ones will get knocked out even quicker which also is motivating.
I like that best
Show off
Snowball is better because of the mental aspect of it. If we had the mental to avoid debt in the first place, we wouldn’t have these problems.
Kivon Campbell exactly.lol this is crazy
In this example you lose sight of the fact that in the debt snowball the man will have paid off over $5,000 on the credit card while he's paying a higher payment on the lower things while the female isn't making those gains on her smaller debts because they're lower monthly payments you can't make an example and not take the other monthly payments during 8 9 10periods into consideration That are depleting the other balances
People who are capable of dissecting the better math of the avalanche are as susceptible to the temptations of debt as anyone. I'm doing it that way and so can anyone if they are serious about paying less money. If you want to get out of debt, it's because you want more money. The avalanche method would be preferred by that logic as well.
You could also say that mathematics show the debt avalanche makes more sense, but if we cared about mathematics, we wouldn't have borrowed the money in the first place.
Avalanche is better because people with self discipline get it done faster...
One other aspect of the debt snowball that may not have been addressed in this video beyond the psychological boost of paying off your loans is the idea that you've freed up income faster so that you're more able to deal with adverse life events. If something happens to both John and Jane one year into their debt repayment, John has 1200 dollars per month to handle it and Jane only has 1000 dollars per month to handle it. Freeing up payments means that financial crises represent a smaller portion of your takehome, meaning you're able to bear the strain without as much risk of losing something else.
Great point!!
Joshua Smith that’s what I was thinking while watching
That's literally the basic tradeoff though... pay more now or later
I agree. I just came here to make a similar comment.
Occupation: Postdoctoral Fellow in Cancer Research
Salary: $47,800 per year
May 2016 Balance: $51,000
October 2019 Balance: $9,720
Earliest Zero Balance Date: July 1, 2020
You're so close!!!
That's great! Good work!
You make 48k a year in cancer research? Not knocking it, but that seems extremely low. But I also don’t know the area you live in taking into account the cost of living and what not. I just graduated college but currently work at a lumber mill making boards and I make 52 a year. The amount I make is extremely high for my areas cost of living, but it took no education to get there. Point being, is that an average salary rate for that line of work? Obviously one must enjoy what they do if money didn’t matter, but it’s still a massively important factor. Just curious though ✌️
How did it go?
@@Apothas541 i know this is an old comment but i looked it up 48k a year seems to be starting salary for that field (cancer research) depending on the area can reach 150k a year through promotions and bonuses etc
Debt Snowball vs Debt Avalanche..... it's like a diet.... if you follow the program, they ALL WORK.
We did a combination of the two types. First we attacked a credit card with an insane interest rate because of how much it was costing us, then once that big bully was gone we went into the snowball method of smallest loans to largest. It was both cost and emotions we considered and it worked for us, 5 credit cards now gone, 2 student loans paid off with a third almost paid off... then we have two more student loans. ugh. But its working.
Moral of the story: strengthen your mind so you can endure the painful and efficient approach.
I use the debt mudslide. I get trapped in it as it drags me downhill while it gets faster and faster and more and more violent, rendering me unable to escape.
It's about behavior modification!!!! Pay off smallest to largest and you will be on fire to stay motivated and keep going!!! 🔥 🔥 🔥 gazelle intense!
I only used credit cards to fund a business. Before then it was for normal shopping and was cleared every month. I am still trying to make a successful business but back at a planning stage again.
Plus, once you get a couple of debts knocked out, you're inclined to pick up some extra work and a second job to clear the larger debts even faster.
Even dave Ramsey says that
I do a mixture of both. I started with the snowball and progressed into the avalanche once all of my small debts were gone! :)
I agree with the snowball method being emotional. I just set up a plan and it has me all giddy like a little girl.
Awesome video, I'm currently doing the snowball method and I can say that when I started I know for a fact that I wouldn't have been able to stick to the Avalanche method. Seeing balances disappear really does have a dramatic psychological effect that motivates the hell out of you to push harder and do more to keep the process going. I did think that ignoring the higher interest rate debts at first seemed silly but seeing the end result made it make sense
"Selling everything until the kids think they're next" 😂
Debt Avalanche all the way. Instead of focusing on seen less amounts of bills per month, i focus on watching the overall balance drop significantly. It gives me plenty of satisfaction to see that balance drop. Also knowing that the bank is getting far far less interest from me is even more satisfying lol
Andrew P You are correct.
Ok. Its been a year ... did you get sidetracked or the avalanche still working for you ?
Darryl Williams in 2 weeks my student loans will be paid it full. It worked very well.
Yep, that was my motivation, too!
I've unfortunately had to do this process twice. The advantage for me of the debt snowball is, if I save the credit card for last, it provides me continued incentive to not use it in the meantime.
you know what gives you an incentive to not use a credit card? a pair of scissors.
It also damages your credit score if it's a high enough balance.
#1Lazer
cut up the cars after they are paid off then and close the account.
@@smithersrob Yeah, I took all my cards to my shredder. They became plastic confetti and I deleted them all from my Amazon account. That way I don't have the expiration dates. Can't give in to temptation if it isn't there.
Anyone who uses a credit card at one point or another said to themselves, I can pay that off in no time, then before they know it they are 25k in debt struggling to make there minimum payment. The debt avalanche is the same mentality and people who try this, good for you if it works, but we as a society need instant gratification. When you have to go 2 years to see results most people will ask is it even worth it and then they give up. For instance if you were at the gym and it took you 16 months to see some physical gains you would quit. However if after only a month you start seeing changes you get motivated and you then have proof that what your doing is working and makes people want to try harder. To each their own. But snowball psychologically is going to be better.
I've had a discover card for 8 yrs and never paid interest. I make $75 3 times a year in rewards that is used on the balance.
Yeah. I've paid interest on my credit card once in four years because I messed up the balance payment.
I think it is more accurate to say that most people dont know how to handle their finances until they get into debt and actually take the time to learn. I do agree we love instant gratification in this country tho.
Anybody? That's only happened to me now and only because I'm taking advantage of a 0% offer rather than skipping directly to a loan.
What's more, by skipping the credit cards, you miss out on the chance to build credit and the rewards points. Which may not seem like a lot, but that credit history can be important when buying a home or even renting a decent apartment.
The issue with the debt avalanche is definitely psychological, but you should be able to make it seem more like you're paying things off quickly. For example, by scheduling the minimum payments on those other balances, so that you don't actually have to go in there and remember that you've got them. And by keeping a shrinking chart of the actual money you're saving off of the predicted debt that you'd accumulate by paying just the minimums.
But you don’t have to wait 2 years to see results with the avalanche method. The total interest paid goes down significantly each month. Which is motivation
Debt snowball is the best method. Mathematically it doesnt make sense, but getting the small debts paid off quickly gives you the mental boost you need to keep at it.
also reducing the total number of bills to pay reduces human error leading to late fees
The snowball was better for me, I also rang all the credit cards and got them to freeze the interest at 0% and agreed a new minimum payment, paid off 5 Credit cards in 7 months, so no interest and I am knocking them out fast.
That's an awesome idea!
Just curious cuz I've never heard of fressing the intrest at 0%
Daniel Cantu exactly I’d like to know how one gets creditors to agree to stop making money off you?
That was the most creative (and entertaining) video about finance I’ve ever seen! Bravo 👏🏻 👏🏻
I'm glad to hear you found it enjoyable 😃
You have to say enough ! ! Life can begin to SNOWBALL out of control if I don't get a good footing .
You still have to have money to live on. While the debt and interest on the credit card may be higher, the payment is lower. If you're just getting by, paying off one of the lower interest, but higher payment debts may be the way to go. Then you can start snowballing after that.
This is a fantastic video. I did see that someone mentioned there was a minor mathematical error. As a former math teacher, this didn't bother me one bit. The principle was still accurate and I appreciated your time and attention to provide an example to compare the two methods. I am using the a "blend" of the two methods and it has changed my life. I appreciate your response pinning the comment and I have definitely subscribed. Thank you!
Avalanche! Done it. and it is extremely motivating to notice how fast my interest payment was readucedceach month!
That's awesome to hear Andra! Sounds like you got the best of both worlds with the avalanche method ☺️
Me too. My husband and I we're very happy that also the numbers of years remained decreases.
me too! when i saw how much interest i was paying, that was motivation enough!
I agree with this 100%.
The debt snowball method works not because it's mathematically efficient, but because it's extremely satisfying to see debts get paid off, and the be carried over to the next step. You also begin paying more in addition to the minimum with each paid of debt.
I'm doing this now with several loans I have. I plugged his numbers into the vertex debt reduction calculator, fancy excel doc. I only came up with a 1 month difference in final payoff but $2600 less paid in interest with the avalanche method. I would suggest people check out a calculator and plug there own numbers in. When I look at the extra $1000 I'm going to pay in interest on my house I think it would feel better to pay off my lowest balance one first event though I'm going to pay more in the long run. The spreadsheet allows you to specify your own order to see how it affects payoff dates and total interest paid. Positive results go a long way digging out of debt. @nextlevellife, keep up the good work! At least your not telling people to get 30yr mortgage like the realtor did on another video.
I started the debt snowball and paid off a credit card. I was on top of the world until I looked at how much money I would be spending long term to pay off my highest interest card so I switched to the avalanche. I will be on track to pay off my 2nd highest interest card in 5 months and be consumer debt free in less than 2 years.
The avalanche hurts at times-especially during the summer, but it is worth it for me. I find that rewarding myself with something small (less than $25 cash) when I pay off a debt is a great way to stay motivated during the avalanche.
Shanile M. absolutely!!! couldn’t agree more! that interest is a killer! avalanche worked for me
This is actually the first I've heard of the avalanche method. I'm just starting to get serious about a manageable repayment plan and everyone is telling me to follow Dave Ramsey and hailing the snowball method... but the avalanche makes so much more sense to me. It's actually really close to how I was logically thinking to go about things before anyone put the snowball method in my head. Very encouraging to hear it's an actual thing people do. Thanks for the breakdown, even though the rough math seems somewhat off.
You've got the right method outlined. The snowball is for people who I feel are easily fooled and manipulated. The avalanche is for those who are logical and calculating (like us). Not only that, since credit cards are usually higher interest rates than cars, student loans, even mortgages, you are very likely to pay them off first with the avalanche method. This will improve your credit score faster if your credit card is maxed out, since credit agencies do not look highly upon people with maxed out revolving accounts. Loans don't really work that way. Best of luck to you.
Snowball works way better. People think they can outsmart things but I can promise you the debt snowball will work out better every time. Only in rare circumstances like a person has two debts only and they're close in amounts but the one has a fairly big interest rate discrepancy.
You should look up Suze Orman. That is her method for paying off debt.
I balance transferred my CC amount to a 0% interest card and paid it off before the interest started back up. Using the debt snowball method, I’ve seen such significant progress and will NEVER get myself into debt again!
Thank you for the video. I have been listening to and watching some RUclips videos of the Dave Ramsey show where he also occasionally talks about how he once encouraged people to use the debt avalanche method but he quickly saw that It didn’t work due to not taking people’s emotions into account. I been learning more about these things lately and appreciate videos like this especially. Thanks a lot.
It all depends on you and your situation. Some people have a very strong emotional response to interest payments and don't want to pay more than they have to, so the avalanche does end up working out alright. Others are in a situation where the lowest debts are also the ones with the highest rates, so the snowball and avalanche essentially become the same thing for them. Others feel a little overwhelmed by all the bills (and possibly phone calls if debts are in collections) and so the snowball really helps them by getting some of those things off the table. They both will work if followed through. The key if you're in debt is to ask yourself which strategy is most likely to be followed through to the end for you. Glad you enjoyed the video and thanks for the comment! :)
If people could do basic math, they wouldn't have personal debt (credit cards, auto loans, etc). I'm not a fan of Dave's investment advice, but for paying off debt, his method is by far the best.
What are some of your best investment advice??
Michelle Kercy That is why Dave Ramsey tells you before starting to pay off debt have an emergency fund of $1000 (for emergencies only like medical stuff). So yea, his method of snowball is the best.
I said the same until my grandma ended up in an institution and my mom got sick. I needed the money.
Forgot to take into account accrued interest and deduction in principal by making minimum payments while focusing on another debt. That being said, Dave Ramsey all the way! Our entire relationship with money is psychological and if people (myself included) were able to make financial decisions based on math and logic there would be no credit cards, no students loans, and no trillion dollar debt.
This is my first time hearing about these pay off debt strategies. It was interesting to learn about both of these techniques(debt snowball v debt avalanche) I will be applying one of these techniques to my personal finance. Thank you for this information! God bless you ! 💯💯💯
just perfect. i finally found the info i needed to make my plan
Haven't read all the comments and I'm not going to trawl through them all, but there's one consideration that has been ignored: risk management. Paying off smaller loans first means that your monthly minimum payment is reduced faster, while under the avalanche it's likely that you will maintain a higher minimum monthly obligation for longer. If you're facing a lack of job security then the snowball might be a better tactic to adopt, as it means that any emergency fund you have will cover your minimum monthly obligation for longer.
I'm confused by your comment. Getting rid of high interest and larger payments while you're solvent makes it much easier to keep up if you lost a job given those that are remaining would likely be smaller minimums and balances making it easier to manage.
@@MichelMawon4982 Imagine a scenario. You have two debts. One is for £1,200, the payment is £100 per month and will last a year. One is for £9,600, the payment is £400 per month and will last two years. You have £100 spare per month you can use to overpay.
If you choose to overpay on the small debt, it will be gone within six months. Or if you choose to overpay the large debt, you will have paid it off in 19 months.
If you choose to overpay the small debt then lose your job after 7 months, your remaining debt payment is £400 per month because the small debt is gone entirely.
If you choose to overpay the large debt then lose your job after 7 months, your remaining debt payment is £500 per month.
So by paying off the smaller debt faster, you have reduced your risk; your emergency fund does not need to be as large (or will last longer) and you now only have one creditor to negotiate with and repay. By paying off the small debt faster, you have also given yourself optionality. After six months you will be able to overpay the large debt by £200 per month if you want. Or you can use the money for something else. Putting the extra cash into the larger debt denies you that option. You have a larger committed monthly payment for longer.
My smallest debt is also my highest interest rate so this is easy for me! I'm just caught between paying off one at a time, and paying off multiple.
Nicole Cater one at a time. Then on to the next one.
I use them in combination to determine priority along with minimum payment, the goal is to free up as much monthly income as possible in my budget, then pay as little interest as possible.
As much as I would love to save the extra interest, I would feel more emotional connection towards the debt snowball effect due to the fact that I would see the progress Im making. I really just need to quit procrastinating and get a hold on my spending habits and start budgeting! Thanks for the helpful info and insight into the numbers to help clarify how exactly they both work.
For the avalanche i imagine seeing the payments lower each month would be the best motivation. Loosing more interest money in the end would be counter for the whole plan to me.
Snow ball feels awesome and works because of that !
Holy crap it makes a difference. Very glad to see a video that does the math. I may do things in a hybrid method - do the INTEREST-BEARING debts first (credit cards), then the INTEREST-FREE debts (iPad on Verizon, paying back some money my parents loaned me, etc) - do the interest-bearing first from smallest starting balance to largest starting balance. That gives you some of the snowball psychological benefits and then also is faster and way cheaper - I’m getting over $110 added per month just in interest on my two former-credit-card balances.
Emotions play a big role especially in a tension filled household.
The debt snowball, for anyone who actually learned what it is and why it's encouraged over the avalanche, is a better route for MOST people. Not everyone, but the vast vast majority. And this is all psychological. People who try to tackle the largest sum debt first, get discouraged and quit way more often because it feels as if no dent is being made. So they take brakes on full focus for a bit, and then return later if ever. The snowball allows people to have small victories up front paying off an entire article of debt, and then have 1 less debt source to deal with. This builds momentum in the emotional and character side, allowing people to push forward and keep going. If you only go by numbers, you are right. But human beings are not robots, we have emotions, passions, goals, "why" we're doing it, etc. So the Snowball is by far the superior method of choice.
“For simplicity,” we are going ignore the payments he’s already made and make the debt avalanche look better.
Everything needs to be factored in to get an accurate conclusion.
Even if you factor in the payments made and interest accrued, avalanche method still finishes paying off everything about 2-3 months faster and saves money in the long run. It doesn't just look better, it IS better.
simple but good illustration!
Loved how you used your chart!
The snowball works better for me. I noticed when i first started dedicating myself to saving. Doing small amounts at a time and then start increasing. When i missed a month of saving i got upset with myself and doubled up the next month. It is more motivating cause it feels like you accomplish more.
I personally like the snowball method even if I'll be paying more in the long run. I personally need to see progress in order for me to keep going. If I don't see progress, I'll just feel like I'm failing still
I’m late but totally found your breakdown through and simple. Thanks wish us luck 🤞🏽
Damn this is eye opening. Thank you so much!
i like the debt snowball :-) i looove seeing extra money on my monthly statement!
Here is something that needs to be said about a key benefit of the snowball method that wasn't mentioned. More margin in your budget quicker. Yes it implicitly talks about more margin for debt, but there is added security in one's financial life due to more margin in case something comes up. Say you pay off your smallest debt that has been $100/month. That's now $100 you can put towards other debt OR something else. Say you have to use your emergency fund. Now you can temporarily halt additional debt payments and use the $100 to replenish that. Or say an unexpected medical bill comes in. You can use it for that. Or maybe someone's income is highly variable and they need say $50 extra margin to deal with that and put $50 more into debt. It's not just more snowball for debt but overall more financial flexibility and thus security. It's not so black and white like people like to make it. And sure these things may never happen, and may even be low probability, but there is a risk factor that people shouldn't ignore with this.
If you instead chose to pay off your highest interest rate that takes let's say 2 years to pay off, you don't see any margin increase at all for an entire two years. You wouldn't be able to make these adjustments for unexpected events without sacrificing something else elsewhere in your budget. In some ways it could be considered a greater financial risk to pay off the higher interest rate debt for those entire two years. As we all know, finances is never purely a numbers game, you also have to factor in risk.
But yes the other method is mathematically better. All this isn't to advocate one method over the other. The video just doesn't mention this as a key benefit to the snowball method.
An excellent point!
Great point! This is the biggest benefit and reason for using the snowball imo.
Thanks for sharing this video ...I truly can't wait to get out of debt!!!!
You can do it!
Helpful, I’ve been researching the Avalanche method and kept seeing the Snowball method mentioned, this went above and beyond in explaining the pros, cons, and differences. Personally, I think I’ll be better off with a lightly augmented Snowball method.
Get a part-time job and use that money as well and you will pay off those debts even quicker plus you have another stream of income. Then when debt is paid off use part-time job money for investment.
That`s like the best advice, very simple effective and straight forward. RECOMMENDED TO EVERYONE.
"so for sake of simply I'm gonna completely mess up the math"
Nicely done ... Well explained and simple to understand.
I've been looking for this kind of video to see what the breakdown would be. Thank you
Glad it was helpful!
Debt avalanche makes sense in your scenario; however many people have outrageous student loans and car payments at lower interest rates, and a smaller credit card bill at a higher rate - so in this case, the difference would be minimal.
Another thing to take into consideration - student loan debt like IRS debt doesn't go away. If you fall on hard financial times due to job loss, illness, divorce, that one will follow you to your grave. (Even can garnish social security!). So, I'd be tempted to get rid of it first.
Chas A
Excellent point. If they had $200,000 on a house, $30,000 for school, $17,000 on a car, and lets say $5,000 on credit cards. Simply paying off the credit cards gives them more money per month and breathing room available. Tackling the house first results in money saved but many more years feeling like your not getting anywhere. They could be paying on everything for 5+ years as opposed to 1 debt gone this year, another done next year, another one 2 years after.... resulting in 3 or 4 debts gone in a 4 year period instead of 1 debt because minimum payments were only being made on the smallest debts while attacking the biggest.
@@outdoorsnevada4138 My husband and I decided to use the avalanche though I was tempted to pay the smallest one first, but we would lose so much money in interest, so we better pay off mortgages. The other one I will payoff, with God’s help, in about one year and a half, anyway. In the meantime, we make extra payments for the mortgages. But it’s not true that you feel like you're going nowhere. We feel very well when we see that the number of years and amount decreases.
Great video! I think the $1000 extra per month is unrealistic. This hypothetical person can already double up on their highest payment. The debt snowball gives momentum to those that don't have a lot of "extra" money because its all tied up in payments. Someone with only $200 for extra principal payments will double their payoff power by getting that car paid off first. The high CC balance and interest rates are definitely the worst part of the equation. Due to the severe disparity between the interest rates, I would advise this person to try to refi that balance to a lower interest credit card or personal loan. If the interest rates were more similar, the snowball would have the psychological and financial benefits. One thing's for sure, every case has its own variables and it takes some wisdom to determine the best course of action. Step 1 stop digging deeper.
That's fair. As you said every person's situation is different and will require thought and proper planning to execute payoff plans effectively. I'm more interested in helping people to grasp the concepts behind the videos and then taking that knowledge and finding ways to apply it to their own situations as they see fit. Obviously the numbers in any of these videos are more for educational purposes than anything else ☺️.
Very good illustrations on the 2 debt payoffs, I am doing the snow ball because I am not making that much now and that one is helping me. I have paid off a loan, 3 credit cards and still going. Hopefully by my birthday in 2020 I will be done very soon with all. I am tired of being slave to debt that I new better to do.
You’re right - there is a huge psychological advantage to the debt snowball payment, especially for people that don’t have a lot to throw at it. In your model, you have a pretty large surplus of money to pay towards debt. Even a debt as substantial as 25,000 dollars would see large gains in having over a thousand dollars applied towards it. Most families (with grocery, utility, insurance, etc...) usually have only hundreds to throw towards debt after minimum payments, especially if they have numerous cards with not as high a balance. So I think lifestyle plays a role in which plan works best. Those with higher income/lowest expenses who can see more momentum in paying off the largest interest debts first should utilize the avalanche system. Those who have less money freed up (like me) would do better on the snowball system because not only are you receiving gratification at seeing the debt disappear but you are then increasing the amount you can apply towards the larger debts when they cycle into the snowball and not have that money spread out and feel like you’re making very little progress. Putting an extra 300 dollars towards a 25,000 dollar bill would feel like an eternity. Being able to roll the payments from a dozen small debts until you are then able to throw 1,000 dollars at it after two years gives people a feeling that they are succeeding.
Funny how these videos always use high earners to make this look simpler than what is is for most people.
Very informative and interesting video. In this example, we're dealing with 3 different classes of debt - the car loan is secured, the student loan is unsecured, not dischargeable in bankruptcy, and must be paid-in-full, and the credit card debt is unsecured and negotiable.
IMO - I would suggest knocking out the car loan first ASAP so that you don't need to worry about repossession, just in case you lose your job or take a pay cut. As for the student loan, it might be worthwhile to do the Income-Based Repayment Plan (IBR) (reduced payments and student loan interest is tax-deductible) while attacking the credit card debt with a vengeance (or negotiating a settlement amount), and then resuming student loan payments until that one is paid off. In other words, a combination debt snowball-avalanche.
I started with the debt snowball and tracked overall debt. We didn't have a lot of money to pay extra so it felt like it never moved. When we switched to the debt avalanche by switching the small overpayments to the highest interest (3rd highest interest at first for us until it was a similar cost monthly because it was a higher amount monthly to start) we saw the overall debt dropping much faster without changing how much we paid. So the mental advantage of debt snowball is less of a selling point when looking at overall debt versus each debt individually.
I had never heard of the Debt Avalanche Method. Thank you for the information and I liked your video very much!
No problem! It can never hurt to have more options at your disposal 😃.
I use both and ask after making eash payments what is the payoff balance. Because depending what is the payoff balance before interest kicks in its actually cheaper or less of the amount.
I wish I had an extra thousand dollars a month. I make a thousand dollars a month.
My question is: What if you combine the both of them? Pay off the smallest amount to give you a emotional boost and then payoff the highest interest and go to the lowest interest rate. This can give you a motivational boost to be financially aware as debt is paid off and you can use more income to pay it down.
Awesome video just found your page a few days ago really enjoying the content 😁
Thanks! I'm glad to hear you're enjoying it 😁!
"Then, Jane saved the $2187.50 monthly leftover and had nearly $11,000 banked by the time John became debt-free."
Actually no. Jane got pissed gave up n filed BK. She was debt free quicker using the BK strategy ;0)
This is really good information on here. We did the debt snowball ourselves, we felt better and more enthused as we could actually begin to see light at the end of the tunnel much quicker. That was a motivation for us.
Most parents, if they know how to manage money at all, don't teach this valuable information that you have been sharing. We began showing our son at an early age as we learned ourselves so he would not make the same mistakes as us. I remember taking quarters, nickels, dimes and pennies to rudimentarily show him how tax worked on earned dollars. We also taught him that for every dollar he received to keep half and save half. He went beyond that on his own, he stuck to his plan from a young age even with birthday and Christmas money he received.
When his friends would spend their whole pay checks in high school, our son, on his own, would a lot himself so much each week and bank the rest. If his allotted money ran out for the week, he simply found something else to do that cost no money. We had told him early on we would match whatever he could save towards his own car. Imagine our jaw dropping when he went to his room when he was sixteen and came out with $2000 in cash. Whoops, we'd not counted on that because he had been socking money away in his savings account. He bought a 1974 Nova that was drivable but not very pretty and began restoring it as he could while still using it for school and work transportation. We were able to keep our end of the bargain by helping him out with things he did to the car in stages. He still has it as a weekend cruiser, he bought a newer Dodge Dart to drive everyday so he could build up a credit history.
Sorry for the long replies, but we enjoy sharing our stories to inspire others. Parents can be amazed at what their kids can be taught that sticks. I know we sometimes wondered if he was even paying any attention. He was more than we knew.
Subscribed.
That story sounds remarkably similar to how my dad first taught me! You are right about how much kids can pick up even when it may not seem like they are fully paying attention at the time. Great story ☺️!
Thanks for the simplified explanation of the two methods . Most people don’t have extra $1000 to just throw to pay the loans. But I love the diagram and pictures used . I will try the snowball effect
I did the avalanche while throwing a few snowball and it helped psychologically as I made progress and increased my cash flow. Now I'm on the tail end and just waiting for the 0% interest to pay itself off. I'd paid to have 0% interest so I'm not going to cancel it out. I like seeing money in my account as a reminder to not go heavily into debt.
The snowball gives you momentum faster because paying off the lowest balance is the fastest thing you can do. That momentum raises moral and gives you some comfort and the feeling of accomplishment. The avalanche just doesn't seem like it would be good for moral at all.
If I had done the debt avalanche, I would have started with a 78k student loan, and I wouldn't feel like I was making much progress. But I've gotten a credit card paid off and my wife's student loans will be paid off this month. I feel damn good and the 78k student loan is the only thing left after this. The avalanche doesn't make sense to me since you might start with only $200 extra to throw at a 10k debt. But with the snowball, when you get around to the 10k debt, you'd probably have $500 extra instead of just $200. Which sounds better? The debt snowball just feels better overall.
Debt avalanche makes sense mathematically, sure... but if we were doing math, we wouldn't be in debt.
If you were doing the debt avalanche, you would start with the student loan? Are you saying your student loan has a higher interest rate than your credit card? That's brutal
Caden Motiuk - Understand Finance lol worse than brutal. That would be enough to make me want to die.
Trace Vision but I’ve never heard of a student loan being over 5% interest, it’s usually like 2 or 3%. Most credit cards are at least 10%, so is he saying that his student loan interest rate is at least over 10%?? Why would someone ever do that?
Trace Vision I bet he’s just made a mistake.
I got “lucky” that out of the two loans I need to pay, the smallest balance happened to have to the highest interest. So I just tackle that one and still feel the benefit of less interest building while keeping my sanity in tact.
Finally debt free, this video started my journey 4 years ago
Dave Ramsey is KING. What he teaches works. Like he says if you understood math you would never be in debt to start with... Thanks for this great video........ I see you addressed the math error in the video great job!!! Loved the video. Awesome work..
why am I watching this.... I have no debt :)
Congratulations Soljarag! That's awesome news ☺️.
Soljarag5 Same here lol but maybe I can help someone else with this information
A great mindset to have!
To rub it in our faces? Lol. That's awesome though. Help others get there too.
🤣🤣
Snow ball it is !, let’s get start it.
I used the snowball method and now I'm down to just student loans. It definitely felt like the best option. It also freed up money very quickly
That is quite a difference! Thank you so much for doing the simple math on this! Wow.
No problem Cmax!
People who thinks Avalanche is the way to go never seem to really get out of debt.
Or do they?
i did & that method worked like a charm for me 🤷🏾♀️
I want to see my progress not seeing I would give up probably
I'm the same way. The snowball worked better for me personally.
Wow! Great illustrative example!!! Avalanche makes for sense but the snowball feels better.
Aside from this video being excellent, I am such an old lady at heart. I laughed for 5 minutes when he said, “selling so many things that the kids think they’re next” 😂