Snowball vs. Avalanche:
Two ways to manage your debt as a homeowner
While debt is something that many homeowners struggle with, it is not always a bad thing. Paying off debt can sometimes help boost your credit score and once paid off can increase your net worth. Borrowing money from a bank or creditor can also help you build toward your long-term financial goals, going to school, starting a business, and most importantly, owning a home.
But too much of anything can be harmful. If you don’t take it on or pay it off thoughtfully, debt tends to grow out of control.
That’s why it’s so important to manage your debt as a normal part of handling your everyday finances. And by expanding your financial literacy and learning about different debt-payoff methods, you can make great strides in staying ahead of your repayments and secure possession of your dream house.
By expanding your financial literacy and learning about different debt-payoff methods, you can make great strides in staying ahead of your repayments and secure possession of your dream house.
Amount of outstanding debt
Bill-paying history
Number of loans or accounts
The Snowball: Building Momentum
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The total dollar amount of what you owe that appears in your monthly statement is really only part of the story. Depending on the interest rate for that particular account, even smaller debts might end up costing you more in the long-run — if you don’t pay it off first.
That’s where The Avalanche Method comes in. This approach asks which debt has the highest interest rate and singles it out as the first to be paid. Once that debt is repaid, you redirect your discretionary income to the account with the next-highest rate and repeat until you are free and clear. This approach means you pay less in the long run.
While The Avalanche Method will likely lead to you paying off all debt on a shorter timeline, there are shortfalls to consider. For one, unlike The Snowball Method, it may take longer to settle priority debt — that which is most urgent. It can also feel like it’s taking longer to make progress.
For other ways to manage and pay down debt, visit fanniemae.com/financialwellness.
The Debt Snowball Method is a strategy by which you prioritize your debts and pay them off one at a time from smallest to largest. The idea is that you direct all your discretionary income to the smallest debt first, and once that is paid off, you can reallocate your funds to tackling the next-smallest debt. This creates a “snowball” effect as your payments grow larger and larger while the rate of debt reduction speeds up until finally, all outstanding accounts are paid in full.
This method tends to reward the homeowner who likes to get rid of smaller nagging debts first, rapidly checking off milestones on their way to focusing on their larger accounts.
The Snowball Method is the road of more instant gratification and therefore, can be a huge motivator for some homeowners. On the other hand, this approach doesn’t prioritize interest rate, which means that some debts with higher rates might be left to accrue, leading to you paying more overall. And that means it might take a bit longer to become completely debt free.
When considering which repayment strategy to pursue, be sure to keep your eyes on your financial goals — both now and in the future. And remember that paying down debt can improve your overall financial standing, such as increasing your credit score and potentially earning you lower interest rates on future loans or refinancing of your home.
While these two methods are popular and effective, they are far from the only approaches to paying off what you owe. And the bottom line? There’s no wrong way to start repaying outstanding accounts and loans and getting yourself and your family out from under the shadow of debt.
Once you’re debt-free, you can then start saving money for your — and their — future.
The Avalance: Taking the Long View
The total dollar amount of what you owe that appears in your monthly statement is really only part of the story. Depending on the interest rate for that particular account, even smaller debts might end up costing you more in the long-run — if you don’t pay it off first.
That’s where The Avalanche Method comes in. This approach asks which debt has the highest interest rate and singles it out as the first to be paid. Once that debt is repaid, you redirect your discretionary income to the account with the next-highest rate and repeat until you are free and clear. This approach means you pay less in the long run.
While The Avalanche Method will likely lead to you paying off all debt on a shorter timeline, there are shortfalls to consider. For one, unlike The Snowball Method, it may take longer to settle priority debt — that which is most urgent. It can also feel like it’s taking longer to make progress.
For other ways to manage and pay down debt, visit fanniemae.com/financialwellness.
The Debt Snowball Method is a strategy by which you prioritize your debts and pay them off one at a time from smallest to largest. The idea is that you direct all your discretionary income to the smallest debt first, and once that is paid off, you can reallocate your funds to tackling the next-smallest debt. This creates a “snowball” effect as your payments grow larger and larger while the rate of debt reduction speeds up until finally, all outstanding accounts are paid in full.
This method tends to reward the homeowner who likes to get rid of smaller nagging debts first, rapidly checking off milestones on their way to focusing on their larger accounts.
The Snowball Method is the road of more instant gratification and therefore, can be a huge motivator for some homeowners. On the other hand, this approach doesn’t prioritize interest rate, which means that some debts with higher rates might be left to accrue, leading to you paying more overall. And that means it might take a bit longer to become completely debt free.
Plan for Success
The first step to achieving any financial goal is to lay out a plan for reducing any debt you might have. To do so, it’s first necessary to understand and organize your debt, whether it be student loans, credit cards, or personal or business loans.
There are two ways to do this. You can either list your debts from the lowest to highest total dollar amount or from highest to lowest interest rate. Next, assess your discretionary income: the money you have left after all the necessary bills and the mortgage payments have been made.
These two factors — how much you owe and how much you have to put toward paying that debt down — will help you decide between two basic methods of debt management for homeowners: The Debt Snowball Method vs. The Debt Avalanche Method.
The Avalanche: Taking the Long View
Focus on Your Goals
The Snowball: Building Momentum
Plan for Success
The first step to achieving any financial goal is to lay out a plan for reducing any debt you might have. To do so, it’s first necessary to understand and organize your debt, whether it be student loans, credit cards, or personal or business loans.
There are two ways to do this. You can either list your debts from the lowest to highest total dollar amount or from highest to lowest interest rate. Next, assess your discretionary income: the money you have left after all the necessary bills and the mortgage payments have been made.
These two factors — how much you owe and how much you have to put toward paying that debt down — will help you decide between two basic methods of debt management for homeowners: The Debt Snowball Method vs. The Debt Avalanche Method.
Focus on Your Goals