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There are two forms of debt payoff methods that are most prevalent in America. The first method is the avalanche. The first method is the avalanche method where an individual would list out his/her debts and pay off the ones that have the highest interest rates first. The snowball method differs by focusing to pay the most on the smallest debts. The avalanche method will save you the maximum amount of interest, but there is little psychological benefit that the snowball method provides by paying off many of your debts.
Popularized by Dave Ramsey, the snowball method is the method that you take your debts and line them up from the smallest to the largest. You make the minimum payments on all of the debts, but you put the extra funds to the debt that is the smallest. After you pay the smallest debt, you snowball the funds you would have used for the smallest debt into the next highest debt.
The avalanche method is the method where you take your debts and line them up by the largest interest to the smallest interest. You would then make the minimum payments on all of your debts, but put any extra funds you have to the debt that has the highest interest rate. Once you payoff the debt, you would then put the funds to the debt with the next highest interest rate.
The challenge is that there is a definite psychological benefit from the snowball method, but you could lose thousands by paying unnecessary interest, especially when the amounts you owe are similar, but the highest debt has a much higher spread on the interest rate.
Another thing to note is that each of these methods were created before there was the modern computing and technology that we have today. The Savvy Method, popularized by the Savvy Debt Payoff App, combines the best of both methods. You will receive some of the psychological benefit of paying off small debts, but you will also receive some of the interest savings provided by Avalanche. Focusing on both the interest savings and debts being paid off can also provide more psychological benefit than the snowball method.
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