Debt Avalanche v Debt Snowball – Which One?

In our article setting out the Dave Ramsey’s baby steps we mentioned in baby step 2 the use of the debt snowball approach to paying off non-home loan debt (often called a mortgage loan). This is the approach Dave recommends people use and it was the method we used in our plan to slowing building wealth. As apposed to using the debt avalanche approach.

Well lets be honest here, it was the first time we had ever had a financial plan … surprising in many ways for a chartered accountant.

Within the personal finance community there is a constant debate about the best way to being paying off debt. Be careful getting caught up in this as I think it creates a disservice to those needing help in paying off debt. Don’t be distracted by the arguments, the pros cons of each method. I suspect some people get caught up in deciding on the best approach and miss the point of, just pay the debt off.

There is a constant debate in the personal financial community between whether to follow the debt avalanche or debt snowball approach.

I realize the irony in writing this article is doing just that, fueling this debate about which method is best. But we wanted to briefly share our personal experience and encourage you to focus on the main issue – which is get the debt paid off and don’t worry about the method you chose. Just chose one; debt avalanche, debt snowball, or some other method … but make whatever you chose part of a financial plan.

Having a Simple Financial Plan

We touched on this above, but to reemphasize is the greatest benefit we found on being on the Dave Ramsey baby steps is that for the first time we had a financial plan to follow. The beauty of the program is it is simple to follow. Do this, then do this, etc etc. Because what we needed to change in our financial lives was financial behavoiur … not knowing more about personal finance (although this has also improved and helped our journey).

My observation is one of the biggest problems people appear to have with personal finances is they wonder all over the place. Why? Because they don’t have a plan; they don’t have a road map and so any path or choice they come to will get them to the “somewhere” they are not planning on reaching.

Have a financial plan, one that is simple, clear and you follow.

Changes in Behavior

The problem for most when it comes to consumer debt does not arise from trouble understand the math but rather themselves and their behaviors. A problem with debt in ones life is not about you not understanding the numbers: earning 3% on your savings while paying 18% on credit card balances being rolled over and 6% on a shinny new car you want to impress the neighbors with.

Its about behaviors. And mine certainly needed to change. And the debt snowball method did that for us. The psychological benefit of this approach and its reinforcement of good financial behavior should not be underestimated. This is real strength of this approach; as you pay off the small debts first, no matter the interest being charged, you get two things:

  1. Every month you are paying off debt and you can see the balances change very quickly. Especially in a month when you get rid of a debt completely; and
  2. By the simple math of the following month now having extra cashflow that can be used to attack the next debt in line. It’s very rewarding and was a big help for us. Especially when you really get stuck into the larger debts that take time, you want to have built the behavior change by the time you get there so you can really put your shoulder into the work.
Generating extra cashflow each month will provide even more money to pay off your debt.

What We Are Aiming For

Please keep in mind that the ultimate goal is not paying off debt but rather building wealth and the life changes it brings. So the prize isn’t whether the debt avalanche or the debt snowball is the best approach. And tt’s not about building a money pot as big as possible. We look at our financial plan, our monthly budget process, our commitment to get out of debt and stay out debt, our monthly saving and investing, as tools that support the things in life we want to achieve. The support and help of others through money and time. Not having constant financial stress that puts pressure on a marriage and friendship. To learn and grow that may be of help to others who struggle with their finances.

These are the types of things we are wanting our wealth to help us achieve. And the baby steps, including the debt snowball used in step number 2, has provided us with the support in guiding us towards this goal.

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