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Snowball Method vs Avalanche Method

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The Snowball and Avalanche methods are widely used to structure repayments towards debt in order to become debt-free. The strategy will differ depending on your personal financial situation, the amount of debt you have accumulated, and your individual needs.

Snowball Method: This works exactly as it sounds. You list your debts from smallest to largest in terms of their outstanding amounts and start paying them off in the same order. To avoid defaulting, continue to make minimum payments on all your debts except the smallest one. Once the smallest debt is paid off, direct the extra money to pay the next smallest debt, celebrating the small wins throughout the journey. The idea here is to gradually gain momentum while you tackle debts from smallest to largest. This is a great method to adopt if you are looking for a quick sense of achievement. Seeing smaller debts disappear quickly can be a real morale booster. When adopting this method, be aware that over time, you might end up paying more interest, as some of these visibly smaller debts might come with high-interest rates.

Avalanche Method: Debts with higher Annual Percentage Rates (is the interest charged for borrowing that represents the actual yearly cost of the loan expressed as a percentage) can cost you more in the long run. You could pay the largest balance first if you hold debts with the same interest rates or pay the debts with high-interest rates first in the case of loans with varying interest rates. This is popularly known as the 'debt avalanche' method. This approach involves systematically repaying your debts to save money in the long run.

While the goal is to become debt-free, it is equally important not to go overboard with analysis. The key is to keep it simple and not lose momentum. Every debt repayment strategy requires financial discipline. Consider seeking professional advice if you feel trapped in debt.

At FREED, we understand the challenges associated with debt management and strive to alleviate this burden, ensuring you can lead a debt-free life. We specialize in tailoring strategies that suit your unique circumstances and guide you every step of the way.

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