Snowball versus Avalanche
In last week’s article, I talked a little bit about debt and the fact that we all use it in some capacity. In our society, it just isn’t feasible that we would live our lives completely without using it – in some way. The more that I have thought about it this past week, the trick is using it the “right” way and not allowing it to become the main piece of your financial picture.
Debt can be suffocating. If not used properly, debt can overtake you and drown you and your family. Studies indicate that “financial stress” is one of the leading causes of divorce in our country. The need for “more stuff” and the ease and availability of credit, can quickly take over a family. Making decisions about a new purchase based upon whether you can afford the new payment, is not smart but it happens every single day.
Enough about the evils of credit! What do we do now? I think we can all probably agree that all our lives would be better if all our debt would be eliminated – if suddenly all of our credit card debt, car loans, student loan debt and home mortgages would vanish! Think of what you could do with your paycheck, if more of those “hard earned dollars” could go toward retirement, savings or FUN. In most cases, debt isn’t simply forgiven but it must be handled systematically – over time. We didn’t get in debt overnight and we won’t get out of debt quickly. There are two systems of thought when it comes to debt elimination. Both plans work but they each have a little different philosophy to “work your plan”.
The first plan is called the “Snowball Method”. This plan starts out with a listing of your debt – smallest balance to largest – and you start throwing everything that you can toward the elimination of the smallest debt. You make regular monthly payments to all your other ones, but you bombard your smallest debt with extra until it is eliminated. As you get it paid in full, you move up the ladder to the next one and do the same thing. This plan is designed to give you small and quick “wins” and help you build momentum as you work up the debt listing. This plan works. I have used it myself and have helped many, many families utilize this method of debt reduction, but it takes a LOT of patience and dedication.
We worked with a family several years ago, who came to us for help with their financial situation. After sitting down with them, they had 38 individual creditors. They had lots of little bitty ones – a bounced check for a pizza purchase, partial payments due for past utility bills, co-pays on doctor visits. The constant mail and phone calls that were coming into their home was suffocating to them. We used the Snowball Method to quickly eliminate about 17 of them and let them concentrate on the 10-12 real bills that they had on their plate. This is still a lot of payments but imagine the relief of knowing that they just got rid of SEVENTEEN creditors. The “win” was enormous and provided this family with a profound sense of relief and success.
The second method is called the “Avalanche Method”. The plan is very similar to the “Snowball” but it works just a little differently. In this one, you start out with a listing of your debt, but it is structured based upon your interest rate and the amount that the debt is costing you. You then start to eliminate the highest interest rate debt first – throwing everything that you can toward it – and then working up the ladder to the next highest interest rate debt. This plan will definitely save you more money, but it may not give you the psychological victories as quickly as the “Snowball Method”.
In either case, know that you always have someone to help you through the process. Putting a plan like this together is your first step but it will require diligence and REAL perseverance to keep the plan in place and maintain your course. If you need a helping hand, we are always here to help.
If this seems overwhelming to you but is something that you have been thinking about for a long time, give us a call and schedule an appointment. We are experts at it and will be happy to offer you some basic direction and advice. It is what we do at Hollander & Associates.