Debt affects our financial growth and our potential, but can also really affect our mental health. If clearing your debt is something that you would like to focus on, then you need a realistic and achievable strategy.
First of all, let’s explore the two common methods for repaying debt…
🌨 The Snowball method
With this approach, you start by paying off the smallest debt first, irrespective of the interest rate. So everything you've got, you pay to that debt. Once that small debt is cleared, you then take the total amount you were paying there and apply it to the next smallest debt. Moving on and moving on. This method can build momentum and builds confidence with each debt that you eliminate.
🏔️ The Avalanche method
With this strategy, you target the debt that has the highest interest rate and overpay everything that you can onto that one. Once that is cleared, you move on to the one with the next highest interest rate and so on. Now, this method is more mathematically efficient because it will save you more interest over time.
But, what are the pros and cons?
This is your debt journey, and so it needs to align with your comfort and your aspirations, and it's about finding a balance. Here are the pros and cons…
🌨 The Snowball method
Pros:
- Psychological Wins: By paying off smaller debts quickly, you get a sense of accomplishment, which can build momentum and motivation to tackle bigger debts.
- Simple and Clear: It’s straightforward to follow—focus on the smallest debt, pay it off, and move to the next one. This simplicity helps many people stay committed to the process.
- Quick Results: You’ll see some debts disappear sooner, which can provide a mental boost to keep going.
Cons:
- Potentially Higher Interest Payments: Since you're focusing on small debts instead of those with high-interest rates, you may end up paying more in interest over time.
- Less Efficient: If your largest debt has a high interest rate, it continues to accrue more interest while you tackle smaller debts, costing you more in the long run.
🏔️ Avalanche Method:
Pros:
- Lower Overall Costs: By focusing on high-interest debts first, you save more on interest payments, making it the most cost-effective method.
- Faster Financial Freedom: In the long term, you’ll pay off your debt faster because less money is being wasted on high-interest payments.
- Ideal for Large Debts: For those with large, high-interest debts (e.g., credit cards), the avalanche method helps you focus on reducing the financial burden faster.
Cons:
- Slower Motivation: If your high-interest debt is large, it might take longer to see results, which can be discouraging. You won't get the quick "wins" that the snowball method offers.
- More Complex: Requires more discipline and focus on the long-term goal rather than short-term rewards, which can be tough for some people.
“Does my age come into it?”
For some, yes it does.
The Snowball Method is often the better choice for younger adults. They may tend to have smaller debts like credit cards or personal loans, and the psychological boost from paying off these debts quickly can build motivation. At a younger age, they may not have as much financial experience or stability, so focusing on quick wins that are simple to follow can help maintain discipline.
However, the Avalanche Method is typically more suitable for those who are older, and who are potentially nearing retirement age. This group may be more focused on saving for a fulfilling retirement and are wanting to reduce the long-term cost of debt. Paying off high-interest debts first means saving more on interest over time, allowing for more efficient use of their remaining working years to reduce financial burdens before retirement.
“But what if I have a mortgage?"
Whichever method you choose, it is likely that your mortgage is going to be the last debt you turn your attention to, if at all – you may decide once you have finished repaying other short-term debt you have other uses for the money.
Mortgages typically have lower interest rates compared to other debts like credit cards or personal loans, which means if you are following the avalanche method the mortgage would be the last one.
For most people, the mortgage is also the largest debt, placing it at the bottom of the list for the snowball method.
"And what if I don’t have an emergency fund?”
In truth? Building an emergency fund should be your priority. Especially before you aggressively plan to start clearing your debt. Without an emergency fund, you risk going deeper into debt if an unexpected expense arises.
Instead, focus on setting aside at least £1000 as an interim emergency fund before starting on a debt repayment journey.
Once your interim emergency fund is established, you can then apply either the Snowball or Avalanche Method.
Ideally a full emergency fund should have 3-6 months of living costs and outgoings in an easily accessible savings account to cover unexpected costs (like broken appliances and car repairs). If you can, split your focus to start building this alongside your debt repayment journey. If not, then once your are debt free make this your next priority.
Conclusion
Whether you choose the snowball or the avalanche method, the destination is the same. You want a financial landscape where debt doesn't dictate your story, and financial resilience triumphs.
The snowball method is best for people who need motivation and encouragement from quick wins, even if it’s less financially efficient. On the other hand, the avalanche method is more suited for those focused on minimising overall interest costs and who are patient enough to stick it out through larger debts.
Choosing the right method depends on your personal goals, financial situation, and whether you value emotional satisfaction or financial efficiency.
Download our Budget Workbook today via our website. This helpful guide and strategic workbook will help you on your debt free journey and for better financial wellbeing.
Clearing your debt should be a part of your overall financial wellbeing strategy. Your lifestyle, age, and circumstances all contribute towards your financial wellbeing and making important decisions in all areas of your finances.
A financial planning meeting with an adviser might be the best next stage for you.
Get in touch with me here or book directly onto my calendar here.
Willow Tree Financial Services and Quilter Financial Planning do not provide advice on Debt, this is for educational purposes only
Willow Tree Financial Services is a Financial Adviser firm based in Polegate, East Sussex, UK. We specialise in Financial Planning, Mortgages, Investments & Pension Planning, Protection & Insurance Wills, Trusts & Estate Planning.
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