Debt snowball? Smother your bills with a debt avalanche
Posted
Jul 16 2008, 05:27 PM
by
Karen Datko
Rating:
Would you rather eliminate your debt with a snowball, or smack it down with an avalanche?
"Flexo" at Consumerism Commentary says, "By choosing the debt avalanche method, you will pay off your total debt faster, you will pay less interest, and you are mathematically efficient." We're all for being mathematically efficient.
Dave Ramsey's popular debt snowball has you list your debts from smallest to largest without regard for interest rate, and pay off the smallest as fast as you can while making minimum payments on the rest. Once the debt is retired, you put that extra money on the next one on your list.
Flexo equates that thinking to believing that one plus one does not equal two.
With the debt avalanche, you list all of your debts -- credit cards, mortgage and anything else -- from highest interest rate to lowest. You pay the minimum on the lower-interest debts and put every available dollar on the debt with the highest interest. (To read his post and get more details about his method, click here.)
He says, "You may have noticed we didn't factor in your account balances in the above formula. That is because your individual account balances are irrelevant."
Flexo also has an answer for those who say the beauty part of the snowball is the "early success" of getting those smaller debts out of the way quickly. He suggests you instead celebrate the first $1,000 you pay off with your avalanche. Just like the early successes of Dave's method, this will stimulate your brain's mesolimbic system, Flexo says. We're all for that too.
"Quick wins may help to motivate debt reducers to continue along the path, but the real win comes in knowing you've made the smarter choice," writes Flexo, who celebrated the fifth anniversary of Consumerism Commentary today.
