Managing your debt is a crucial part of your personal finance and financial health. In a dynamic financial landscape like Singapore, it is of utmost importance to understand the most effective repayment strategies to be able to make the most informed decisions. 

There are two popular methods that are often discussed and considered when it comes to debt repayment strategies, they are the debt snowball method and the debt avalanche method. 

While both approaches have the same goal of helping individuals reclaim their financial stability and freedom from debt, they differ in various ways. This guide aims to help you better understand the two and allow you to decide which method works best for your specific situation. 

The Debt Snowball Method

The basis of the debt snowball method focuses primarily on small victories that build momentum and confidence in debt repayment. By choosing to clear your smallest debts first before working your way towards the larger amounts, you allow yourself small victories in a more manageable manner. 

To begin the debt snowball method, Debtox recommends you list all your existing debts from the smallest amount to the largest. This will give you a clearer picture of what is owed and who your various creditors are. Include the minimum payments required for each of your debts. 

Make the required minimum payments to all your creditors except for the smallest one. You will then work towards allocating any extra funds toward paying off the smallest debt most aggressively. 

By focusing and targeting your smallest debt first, the mental burden is reduced as the amount is likely to be more manageable. At this point, it is also likely that psychologically, you will feel a sense of accomplishment. It is crucial that you continue to build off of this momentum and mindset. 

Returning to your initial list created, you can cross off the smallest debt that you have now managed to tackle and move on to the next lowest amount. The key here is to repeat this process until you have repaid all your creditors. 

This method is seen as effective as it provides individuals with the ability to secure quick wins. Paying off your smaller debts creates a sense of accomplishment and provides motivation to tackle debts with a sense of drive and purpose. 

The debt snowball method has been proven to be particularly successful for individuals who struggle to maintain momentum during their debt repayment journey. 

The Debt Avalanche Method

On the other side of the coin, is the debt avalanche method, contrary to the debt snowball method, it prioritises focusing on interest rates over debt balances. 

As we know, interest rates on debt such as credit card debt can be high. Meaning that while you may be making regular minimum repayments, your principal will not reduce. This can be disheartening and lead some individuals to incur more debt in a last-ditch effort to make lump sum payments, without realising that they are placing themselves in a vicious cycle of debt. 

To begin, similar to the debt snowball method, Debtox suggests that you list all your existing debts. However, this time the focus will be on the debts with the highest interest rates as opposed to the sum owed. 

Ensure that you continue to make minimum payments to all creditors except the one with the highest interest rate. With the debt avalanche method, you will instead allocate any extra funds toward paying off the debt with the highest interest rate the most aggressively. 

Once you have successfully tackled the debt with the highest interest rate, you will be able to work your way down your list of debts incurring the next highest interest rate. By using this method, you reduce the amount of debt incurred over time, potentially saving you money in the long run compared to the debt snowball method. 

Prioritising high-interest debts allows individuals the opportunity to expedite their journey towards debt freedom. 

Which Method Is Right For You?

When deciding which method, the debt snowball method or the debt avalanche method, it is crucial that you first determine your financial goals and personality. 

Some factors you should consider are:

• The Psychological Impact

If you recognise that you are the type of individual that requires quick wins to stay motivated and on track with your debt repayment goals, the debt snowball method may prove to be more beneficial to you. 

However, if the concept of long-term savings seems more appealing to you then the debt avalanche method is better suited for you. 

• Interest Rates

As mentioned, the interest rates on your debts can be difficult to tackle and even with regular monthly repayments, it is typical to not see the principal amount reduced. The debt avalanche method has the potential to save you money over time as you are clearing your debts with the highest interest rates first. 

• Financial Situation

When deciding between the two methods, debtors must also consider their current financial situation and stability. Consider what your average monthly cash flow looks like. The method that is likely to be the most successful for you is the one that aligns with your budget and monthly essentials. 

If you have a higher monthly income, it may be more manageable to approach your debt repayments with the debt avalanche method. However, if your monthly income is required for essentials and dependants, the debt snowball method may be more appropriate. 

In Conclusion… 

To conclude, both the debt snowball method and the debt avalanche method offer an effective debt repayment solution. When deciding, it is important to consider your financial situation, the individual interest rates on your various debts, and your personality and motivation. 

Regardless as to whether you choose to prioritise quick wins or long-term savings, both of these methods will help you achieve freedom from debt. The key is to take the first step and stick to your decision. Keep your goals in mind and remember that it is possible to achieve freedom from debt in Singapore. 

If you are facing a situation in which you feel that you are unsure how you should be tackling your debt, schedule a free consultation with one of Debtox’s Debt Consultants. We will be happy to help you understand your options and propose a solution that suits your ability and goals.