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Is Debt Stress Making you Sweat?

Cool it with a snowball or an avalanche

It can be the first thing you think of when you wake up in the morning and the last thing you think of when you go to bed at night.  Debt is a silent burden. For those living under the weight of student loans, credit cards, bad investments or medical bills, they know far too well debt's impact.   Debt can leave you paralyzed.  It puts on hold decisions like moving out of the family home or making major purchases like buying a car or house.  It even delays major life choices like marriage and starting a family.  Debt robs you of the courage to seize opportunities that could lead to emotional or financial reward if they involve even the slightest risk.  If you are one of those standing on top of a mountain of debt, there is hope. You can begin to roll down from the summit of debt by snowball or avalanche.

Debt Snowball
Do you remember how to make a snowman? You would start with a small snowball and roll it and roll it until it grew into a very large snowball!  When it comes to paying off debt, the Debt Snowball method works in the same way.  A Debt Snowball is a process where you pick the smallest debt to pay off first, and when it's paid off, you move on to the bill with the next highest debt until you reach the one with the largest balance. The benefit of this method is that it satisfies the need for immediate gratification and provides a sense of accomplishment. Its success is based on quickly knocking off the smaller debts and riding this wave of momentum until the larger debts are paid off.

Debt Avalanche
For those who are highly motivated and disciplined, another option is to start with the debt with the highest interest rate, even if it is the largest.  An avalanche starts at the top of a mountain and doesn't stop to it reaches the bottom. By eliminating the high interest debt first, you pay less money in the long run.  The downside of this method is that you don't get the satisfaction of crossing a debt off your list right away like you would with the Debt Snowball method. But if the goal is the least amount of money repaid, the Debt Avalanche method achieves this by aggressively tackling the debts that are doing the most damage.

Is it Better to "Snowball" or "Avalanche"?
When it comes to outstanding debt, any strategy to pay it down is commendable.  But an individual's personality plays a factor into determining the best route to go.  A relaxed carefree personality would most likely be content with the Debt Snowball method.  This is especially true if they aren't interested in details and theories and they want to see results without complications.  A more Type A personality, or a number cruncher, would be better suited to the Debt Avalanche method. This method is better suited to an analytical or logical mind.  But for the majority of people who aren't squarely in either the carefree or overly analytical category, the best approach is a combination of both.

How to Use Both Strategies
The best method for paying off your debt quickly and without becoming discouraged is combining the theories behind both the Debt Snowball and the Debt Avalanche.  Start your pay down plan by gaining the psychological advantage that comes from the snowball method. This is achieved by paying off the very lowest balance.  This allows you to check something off your list at the beginning of your debt reduction plan which gives you the momentum to continue. Then switch to the avalanche, hitting hard at the debt with the highest interest rate.  If you begin to feel bored or discouraged, switch back to the snowball method and eliminate your next smaller debt to gain the psychological edge again.  Our emotions and motivation are fluid.  Allow your debt repayment plan to be fluid as well.

After you begin your plan, if the stress of your debts is still draining, consider automating the payments.  Determine what amount needs to be paid monthly towards each debt. Set up online banking to pay them automatically each month. Then sit back and let it go for a few months.  By creating automated payments, you are able to emotionally walk away for a brief period of time knowing that it is being handled.  Go back after a few months and check your progress.  You will be able to see that even small amounts adds up over time.

Debt can be painful. If not controlled, it will control you. The Debt Snowball and the Debt Avalanche methods of debt reduction will help you regain control over your finances and your future.  Choose the plan that suits you best, or combine both. Once started, you will begin your journey down from the mountaintop.   A journey of a thousand miles begins with one step.  Begin that journey today.

Cindy Diccianni is a certified long term consultant, a registered investment advisor and a registered representative with Leigh Baldwin & Company member FINRA and SIPC. She is founder, owner and principal of Diccianni Financial Group, Inc., East Norriton, Pa. You can contact her at Jeanne Lawson is a client manager with Diccianni Financial Group Inc.

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