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You will have heard about the avalanche debt repayment method. You will have also heard about the snowball method. Which one is right?
I can’t tell you the amount of people who think they know the best way for people to pay off debt. They always tell me “the best option is always the avalanche method” because “it will save you the most money.”
Well, guess what. There’s a reason the snowball method is so popular. Sometimes, it’s not about the money you pay via interest rate but about seeing the debt go down. The two methods are for different types of people.
What are the two debt repayment methods?
I’ve gone into these in much more detail before. As a brief overview, the avalanche method works by paying the largest debt first or whichever one has the highest interest payments. The aim is to pay off the one that you’re paying the most interest to first to free up extra money and pay less over time.
The snowball method works by paying off the lowest debt first. This way, you see that you are getting yourself debt free. You see that it is working and you keep going with the rest of your debt.
Which debt repayment method is right for you?
Before I recommend either of the repayment methods for my clients, I want to get to know them. I need to know what type of mindset they have, and how they work best when it comes to managing money. I have clients from all sorts of walks of life. Some are terrible with their money while others are great and just want help investing in the right place. There is never any judgment from me.
The first thing I look at is their personality type. Is my client emotional or logical? If logical, I may consider the avalanche method for them. If they’re emotional, the snowball method is more likely to benefit them.
Then there’s how they view success. Do they look long term? In this case, the avalanche method may work. They are happy that they’re saving the most money in the long term, and that’s their goal as well as to clear all the debt. But what if they need small successes to keep them on track? In this case, the snowball method is going to work better for them.
Sometimes it can depend on the type of debt or the amount of debt they have. Let’s say they have two credit cards. One has a $1,000 balance with a 19.9% APR and the other has a $1,200 balance with a 23.9% APR. In this case, for either of my clients, I’d recommend the higher balance. The avalanche method works well here since the balances aren’t that far apart. It won’t take long to get the $1,200 below the $1,000, and this saves money in the long-term.
Let’s say the client has a $1,000 credit card balance at 19.9% APR and a $600 loan to a family member with 0% interest and no deadline. The avalanche method is a no brainer, although I would encourage the client to pay off the loan to family in increments to pay it down and show that you are honoring the fact that it was a loan.
Now let’s say a client has three credit cards all with the same interest rates. One has a $500 balance, one has a $1,500 balance, and one has a $5,000 balance. If my client was the right personality to see the benefit of getting rid of the largest balance first, I would recommend the avalanche debt repayment method.
However, I have a lot of clients who need to see a debt gone to feel like they are successful. In this case, I’d go with paying off the $500 balance first and then work up to the $5,000. If I told my client to pay off the $5,000 debt first knowing that they needed to see the smallest success to know it was working, I’d lose them!
You see, choosing a method isn’t as simple as “you’ll save the most money if you do it my way.” It’s about working with how your mind works best.
If you have an unsettled debt owed to you, you need to consult Thailand debt recovery lawyers for professional legal advice and to help you collect what you are legally entitled to from a debtor.
Which debt repayment method works best for your needs? Let me know in the comments below.
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