Avalanches and Snowballs: Strategies to Pay Off Debt

If you have debt, you might be trying to pay it all off as quickly as you can.

Reserve Bank data shows that the country’s household debt since 2004 has been at over 150% of household incomes.

While some debt, such as a home loan, can stick around for a while, in other cases, you might have smaller loans that you’d like to bid farewell to.

There are a few ways you can do this, but choosing a strategy that works for you can make all the difference.

Understanding debt repayment strategies

Having a strategy can be an important part of staying on track to get debt-free.

Sometimes, debt feels a bit daunting, and some people find it tempting to not think about it a lot.

But having a hands-on, thoughtful approach can save you money in the long run.

Tackling debt in a structured way means you’re more likely to stick to the course and get to your goals, because you know what you need to do and how it should work.

Here are a couple of ways to try.

The debt avalanche method

The avalanche method could work out the cheapest way to clear debt.

With this method, you need to work out what interest rate you’re paying on all your loans.

While making sure you’re at least making minimum repayments on all of them, devote any spare cash you have to paying off the debt with the highest interest rate first.

Then, when that is clear, shift to the next most expensive debt and so on until your debt is clear.

If you were already making higher-than-minimum payments on all your debts, concentrating on one at a time like this can give you an interest rate saving for the same outlay because your highest-interest debt will not be around as long.

If you have a buy now pay later (BNPL) debt that is interest free, for example, a car loan that’s charging you 15 percent and a credit card at 22 percent, you’d set your normal minimum payments for your BNPL and car loan, then focus on paying off the credit card.

Once the credit card was clear, you could move to the car loan.

It’s important to check that you understand any early repayment fees you might incur.

But take care…

Progress can sometimes feel slow with this method, especially if your most expensive debt also happens to be a big one.

It might help you stay the course if you set milestones to celebrate along the way.

You’ll need discipline and consistency to stick with it to the end.

The debt snowball method

An alternative is to use the debt snowball method.

This can be a good option for people who are motivated by quick wins.

Taking the same list of loans that you were working within the avalanche method, with this approach, you start by focusing on paying off the smallest first.

Once that loan is paid off, you move on to the next biggest until they are all back at zero.

By tackling smaller loans first, you can see your success more quickly, which can be motivating.

As with the avalanche method, it is important to understand any fees that might be associated with repaying your loans early and factor those into your calculations.

But take note…

This method may mean you may pay more in interest over time because your smaller loans may not have your highest interest rate.

It also might not be the fastest path to debt freedom. But if you have a plan and stick to it, you’ll get there in the end.

Avalanche versus snowball method

Avalanche

• Most expensive debt first

• Should save you money if you clear high-interest loans first

• May require commitment if it takes time to start to see success

Snowball

• Smallest debts first

• Can be motivating to see the “quick wins” of loans disappearing

• Might not save you as much money

As you’re working on paying off your debt, it will be important to have a workable budget so that you can meet your repayments, as well as your other living costs, without the need to take out further loans.

Factors to consider

When you’re deciding what strategy to pursue, there are a few things to think about.

Interest rates and types of debt

If you clearly have one debt that has a much higher interest rate than the others, the avalanche method may be a more obvious choice than if you had a number of loans with similar rates.

Size and number of debts

On a related note, the number of debts and how big they are (and how long they’ll take to clear) could inform your thinking. Do you have any that are too expensive to repay early because of the fees associated?

Personal motivation and discipline

Are you the type of person who can stick with something even if results take a while, or do you need a little boost on a regular basis to keep you going?

Financial goals and timelines

How your debt repayment fits into the rest of your financial picture will also play a part. Do you have other financial goals you need to get going soon? That may mean you need results more quickly.

Combining strategies: Is it possible?

Depending on your loans, you may be able to mix up your strategies.

You might start with the snowball method to get some wins in the bag, then switch to the avalanche method to start saving more interest.

The best way to do it will depend a lot on your circumstances.

Step-by-step action plan

Get started

List all your debts and the interest rates you’re paying on them, and put them in order of priority, depending on how you’d like to tackle them.

Get your tools

There are a number of tools that might be useful to you. Sorted offers debt repayment calculators, and the team at better finance™ can help if you think debt consolidation might be a better option.

Stay accountable

Track and report on your progress. That could be by working with someone you trust or just regularly checking in with yourself against where you should be.

Common mistakes to avoid

Don’t get caught out by some of these common mistakes.

Ignoring the emotional side of debt

There can be a lot of emotions tied up with your debt, as with many aspects of your financial life. If you’re feeling overwhelmed or stressed, think about where you might be able to get help or advice on how to tackle it.

Overlooking fees or penalties

There can often be fees or penalties associated with repaying debt more quickly, particularly if it has a fixed term. Make sure you know what these will be so you can decide whether it’s worth doing.

Not adjusting your strategy as your circumstances change

As you go along, things might change. You might get a pay rise, which means you can afford to pay off your loan more quickly. Something might happen that means you can’t afford to pay off your debt more quickly. Carefully responding to these changes will help you stay on track.

Frequently asked questions

What if my debts have similar interest rates?

If the rates are the same, you can think about other factors – what fees are associated with each loan? Which is the smaller loan? Which would you rather not have hanging around first?

Should I consolidate my debt before starting?

Debt consolidation can be worth considering, depending on your circumstances. Some people find it easier to manage one loan rather than several, and you may be able to save on interest. We can help you work out whether this is a sensible option for you.

How do I stay motivated during setbacks?

Things don’t always go to plan, and that’s ok. It can help to have someone to chat with to help you get back on track. You might also try to build a bit of leeway into your plan from the outset so that you know that a little hiccup doesn’t need to throw you off course.

Do you need help?

Whether you’re thinking about taking out a new loan or consolidating existing debt, the team at better finance™ can help. We’re expert financial advisers with lots of experience in all sorts of personal lending.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.