Ramit Sethi has been helping people improve their finances for more than a decade. His book “I Will Teach You To Be Rich” has thousands of Amazon reviews and continues to resonate with many people on their financial journeys.
He recently gave a detailed plan on how to get out of debt and touched upon two popular strategies: the debt snowball method and the debt avalanche method.
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The debt snowball method involves paying off your smallest balances first to build up small wins, while the debt avalanche method prioritizes your balances with the highest interest rates. While Sethi says you should focus on the strategy that’s right for you, he identifies the clear winner.
“The avalanche method is mathematically the best choice.”
Sethi breaks down why the debt avalanche method is better and when the snowball method makes sense.
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Why The Debt Avalanche Method Is Better Than The Debt Snowball Method
The debt avalanche method can get you out of debt sooner and result in lower interest payments. By prioritizing high-interest debt first, you end up paying less interest as you get out of debt.
A good example is if a borrower had these two debts:
$1,000 at 5% APR
$10,000 at 20% APR
People who follow the debt avalanche method will work harder on the $10,000 balance and only make minimum payments on the $1,000 balance. Making more payments toward the $10,000 balance means less of your money is subject to 20% APR.
On the other hand, the debt snowball method says that you should pay off the entire $1,000 and only make minimum payments on the $10,000 balance. Less of your money will be subject to 5% APR, but you still have 20% APR on your other balance.
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Why Some People Should Still Follow The Debt Snowball Method
Sethi still believes the debt snowball method is valuable because it can give you a small win. For instance, seeing both balances can be frustrating, but eliminating the $1,000 balance can give you some extra motivation.
The debt snowball method is not the most practical strategy, but it can build momentum. Sethi doesn’t care which strategy you use as long as you pick one and commit to it. You can change course and prioritize the debt avalanche method if you want to get rid of high APR debt, but it’s important to stay focused on paying off debt.
Tracking your debt can help you decide which path is right for you. Some people may have to use the debt snowball method first to get motivated and build momentum. However, if you are already motivated to pay off debt, you will save money if you use the debt avalanche method.
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This article Ramit Sethi Breaks Down Debt Snowball Vs. Debt Avalanche Method: ‘The Avalanche Method Is Mathematically The Best Choice’ originally appeared on Benzinga.com
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