Is your debt a snowball or an avalanche?

Lawrence Castillo

Getting rid of debt anytime is a great idea. After all, carrying heavy debt is known to cause various psychological and physical ailments. Being chained to a pile of bills leads to the loss of opportunities and options that can improve one’s life.

These problems are amplified when a person is ready or forced by circumstances to retire. Although an alarming number of people do, retiring with debt is strongly discouraged.

I often tell my clients, many of whom are retiring from federal jobs, that reducing or eliminating debt is the first step to creating a happier, less stressful, and freer life. But, as most of us know, paying off debt can be a daunting task. Fortunately, the pace of the process is steady and relies on factors other than simply paying off the highest interest rates.

Traditionally, debt elimination has been presented as the “snowball” way or the “avalanche” way. Both are easy to understand and implement and are helpful ways to eliminate debt from your life.

The snowball and avalanche plans allow you to list your debts and make minimum payments on all but ONE of those debts. The methods differ when choosing which debt receives the additional payments.

If you select the debt avalanche method:
1. You make the minimum payments on all your debts. Then use the remaining money to pay off the debt with the HIGHEST INTEREST rate.
2. This often results in lower payments over time.
3. In addition to looking at higher interest rates, you may want to select any debt with a teaser rate due to expire. Many credit card companies keep you away from the competition by offering temporarily low interest rates. Remember that these are temporary rates, otherwise you will end up paying higher interest rates than necessary.

Choose the snowball method also involves making minimum payments on all your debts. This time, however, you’ll pay off the smaller ones first instead of paying extra on the higher-interest debts. The snowball method may seem less desirable than the avalanche. However, when we consider the psychological factors that influence our financial decisions, you can see how highly motivating the feeling of accomplishment and progress can be. The Debt Snowball can keep you dedicated and focused on debt reduction by shortening your list of debts faster.

So which method to choose?

You know each other much better than I do. So, I will say, given that self-awareness, you need to select the method that you are most likely to stick with. Many experts believe that the debt avalanche calculation makes it the obvious choice because it will save you money and time. But, since most personal finance decisions are made with emotions rather than head knowledge, this might not work for everyone.

Like shedding a few extra pounds, debt reduction isn’t fun or exciting. If you’re the type of person who isn’t driven by charts, graphs, and math, but needs immediate gratification, consider snowballing instead.
Throwing big wads of cash at high-interest debt and only seeing it reduced slightly can be daunting for some people. If you know you’re the type of person who needs a little nudge in the right direction and needs to see progress right away, then you can follow the snowball method.

On the other hand, if you’re all about the BIG PICTURE, love math, and are patient and consistent, a Debt Reduction Avalanche Plan offers the potential to lower your monthly payments and save you a lot of money in the long run. Of course, it’s always possible to create a “hybrid” plan to tackle your consumer debt, like credit cards, and then pay off things like car loans, student loans, or other non-credit card loans. credit.

Takeaway meals
· Reducing and eliminating debt is always a good idea, whether you take a snowball or avalanche approach.
· Understanding your level of risk tolerance, motivation and patience is key to developing the most effective plan.
· Be balanced in your approach to debt.

Eliminating debt from your life is a goal worth considering. This will go a long way towards bringing you more prosperity and peace of mind when you are no longer on salary. If you want more suggestions on eliminating debt, creating extra income for retirement, or if you’re a federal worker overwhelmed with the complexity of your benefits package, consult a trusted, licensed financial professional. .

Lawrence Castillo is a member of Syndicated Columnists, a national organization committed to a fully transparent approach to money management.