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Avalanche Method

March 2, 2023 • By Kevin Alvarez

Paying Down Debt Is Saving — America Saves Week 2023

Making the decision to pay down debt, particularly consumer debt, can be mixed with emotion. You feel good about choosing to take concrete steps to pay off balances on credit cards, auto loans, student loans or other installment loans. On the other hand, you feel less positive about the amount of money you are directing into a savings account. Well, we’re here to show you how reducing debt is a form of saving, to give you strategies for the best way to do so that align with your personal situation, and to boost your financial confidence to keep you working toward your goals.

As you pay off your debt you are freeing up money, allowing you to direct those funds toward saving for something else that’s important to you – perhaps an emergency/opportunity fund, a vacation, home purchase, or retirement. This money is freed up as you spend less on interest, and possibly late fees, and lowering the debt balances themselves.

If you have more than one debt you want to pay off, for example an auto loan and a credit card balance, there are two main strategies to help you decide which debt to pay off first.

  • The snowball method focuses on the balances of each loan. In this strategy, you make the minimum payment on all your loans except the one with the smallest balance. With this loan, you put as much money as you can toward it and when it is completely reduced you allocate that money to the next smallest balance. Your confidence gets a boost every time you see an account balance at zero.
  • The avalanche method focuses on the interest rates of each loan. In this strategy, you pay the minimum payment on all your loans except the one with the highest interest rate. You apply any remaining money you have for debt repayment to the highest interest rate loan. By paying off the debt with the highest interest rate first you reduce the overall amount of interest you must pay.

You choose which method is right for you and your situation.

Once you are on a path to reducing your debt, reflect on the type of relationship you have with credit. Credit is a tool. When used wisely and with purpose, credit can help you achieve your financial goals and build financial confidence. Having a clear view on when and for what purpose you use credit is the foundation for a positive relationship.

Sometimes we’re told that there are good types of debt (home mortgage) and bad debt (credit cards). This type of categorization is based only on the financial aspect and not the personal situation you are dealing with. It may feel better to ask yourself if the type of debt you are taking on is a good decision for you or not.

For example, when an emergency expense crops up and it is large enough that it will deplete all or nearly all of your emergency savings, you may feel like you’re on shaky ground if another expense crops up before you can replenish your savings. So, you may weigh this option against using a combination of savings and credit based on what feels best for you in the situation.

Making purposeful choices about credit, something that you plan for financially and mentally, can help you build more financial confidence.

You can use the America Saves Spending and Saving Tool to calculate how much you have available for debt repayment, take the America Saves Pledge to make a plan for this repayment, or listen to the ThinkLikeASaver Podcast for even more tips.

SafeAmerica Credit Union is here to help you on your saving journey. Check out all the Savings opportunities we have to offer.

Savings Accounts

November 6, 2020 • By Kevin Alvarez

Pay Off Your Debt

Information brought to you by our partner, GreenPath Financial Wellness

If you are dealing with debt, you aren’t alone. The average American household has an average balance of about $6,600 in credit card debt,  and that’s not taking into account home, auto, and student loans. Paying off your debt isn’t always easy, but having a plan can go a long way in achieving your financial goals.

Two of the most popular strategies for paying off debt on your own are the snowball method and the avalanche method. Both methods require making the minimum monthly payments on all but one debt, which you put extra money towards.

The Snowball Method

With the snowball method, you begin by paying off your smallest debt first. This method creates a sense of motivation and accomplishment from being able to pay off smaller bills at a higher frequency.

How it Works

Let’s say you have the following debts:

  • Credit Card A: $3,500, 17.99% APR
  • Credit Card B: $7,500, 15.00% APR
  • Personal Loan: $1,000, 10.05% APR

Using the snowball method, you would pay the minimum monthly payments to the credit card debts, and pay any extra that you can to the personal loan until it is paid off. You would then apply the extra payments to Credit Card A until it is paid in full.

Pros and Cons

With the snowball method, you are able to see progress faster. Quick wins can help you stay motivated to keep going. However, with this approach, it will take you longer to pay off your largest debts—and those are often the ones that carry the highest interest, so you’ll likely end up paying more overall.

The Avalanche Method

The avalanche method takes into account the fact that high-interest debts cost you the most money over time. Using the avalanche method, you pay off your highest interest debts first.

How it Works

Let’s look at the same scenario as above.

  • Credit Card A: $3,500, 17.99% APR
  • Credit Card B: $7,500, 15.00% APR
  • Personal Loan: $1,000, 10.05% APR

With the avalanche method, you’d pay the minimum monthly payment on Credit Card B and the Personal Loan, and pay extra towards Credit Card A, since it has the highest interest rate. Once it was paid off, you’d move on to Credit Card B.

Pros and Cons

This is the fastest way to eliminate debt and save on interest payments. However, it can take years to eliminate this debt while other smaller bills still trickle in.

Which option is best for you?

It comes down to what you feel most comfortable with. Ultimately the best method is the one you can stick to. If you’re motivated by quicker victories, the snowball method may be the right option for you. If you want to pay the lowest amount of interest, you’re likely better off choosing the avalanche method.

Learn More
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