- August 5, 2021
It’s time to start cooling down from summer spending with snowballs and avalanches. I know many persons have spent a lot more money this summer then they have the entire past 12 months. With pandemic fatigue at an all-time high and more and more people feeling comfortable eating out and even travelling it’s really no surprise. So now is the perfect time to get back on track with budgeting and plans to get rid of debt before the holiday season. But what does snowballs and avalanches have to do with spending? Allow me to explain. In financial terms, there are two especially effective methods of getting rid of debt as quickly as possible.
Let's talk about the Debt Avalanche method first. Think of it like this, when an avalanche occurs it begins with large amounts of snow rolling down a mountain and the further down it goes, the amount of snow at the bottom gets smaller. This is how your payment pattern should look. The concept behind this is that your priority would be paying off the larger debt payments (highest interest rates) that you have first and then working you way down to the smaller ones.
Pros
1. Will result in paying less and less interest payment overtime
2. Can reduce the time it takes to pay off your debt by months or even years
3. Best to use with student loans, credit card loans and medical bills
Cons
1. It does take a lot of discipline and patience to set aside large sums of money every month
2. It can take a toll on those with lower incomes until the larger debts are paid off
As you’ve probably figured out the Debt Snowball method takes the opposite approach, but still effective, nonetheless. To carry this out, you would get all your smaller debt payments out of the way first and then work your way up to getting rid of the larger ones. Again, as the name suggests, this method reflects a snowball if it is being rolled in the snow. The more snow that accumulates the larger it gets.
Pros
1. You will see the results from this method faster
2. Seeing more of your debts being paid off motivates you to keep going
3. It takes less of a strain on your savings since you are getting rid of one small debt at a time
Cons
1. You would be paying more interest payments if you put set aside your larger debts for too long
2. This also takes discipline because you will still have to set aside as much money as possible for larger debt payments.
Even though both methods are effective, the results may vary from person to person depending on financial obligations as well as their annual income. So, make sure that you choose the method that works best for you on your journey to becoming debt free.
Once your debt ratio is down to a manageable level, you can use the same payments that were going towards paying off debt to fund your investment account and begin growing your wealth. What the ideal debt ratio is will depend on your circumstances but we encourage you to speak with one of our investment experts to help make a unique plan just for you. You can schedule an appointment today by emailing invest@rfgroup.com.