Debt is a burden that affects countless Canadians. According to the MNP Consumer Debt Index, nearly one-third of Canadians struggle to cover monthly bills and debt repayments. Even more concerning, 48% are just $200 away from financial instability. If this sounds familiar, it’s time to take control of your finances.
Two tried-and-true strategies—The Debt Snowball Method and The Avalanche Method—offer structured approaches to tackling debt. Each has its strengths, so understanding them is key to choosing the best fit for your situation.
The Debt Snowball Method
How It Works
This method focuses on momentum. You start by paying off the smallest debts first, regardless of their interest rates, while making minimum payments on larger debts. The quick wins boost motivation, helping you stick to the plan.
Steps to Follow:
- List your debts from smallest to largest (ignore interest rates).
- Make minimum payments on all debts except the smallest.
- Put any extra funds toward paying off the smallest debt.
- Once the smallest debt is paid, move to the next one on your list.
- Repeat until all debts are eliminated.
Who It’s For
- Ideal for people who thrive on visible progress and small victories.
- Works well for those who need a psychological boost to stay motivated.
Example:
- Debt 1: $300 at 15% interest
- Debt 2: $1,500 at 20% interest
- Debt 3: $10,000 at 5% interest
Pay off Debt 1 first, then move to Debt 2, and finally tackle Debt 3.
Pros:
- Builds momentum quickly.
- Boosts confidence and motivation with frequent "wins."
Cons:
- May cost more in interest over time compared to other methods.
The Avalanche Method
How It Works
This approach prioritizes paying off the debt with the highest interest rate first, saving you the most money in the long term. While it may take longer to see progress, the financial benefits are significant.
Steps to Follow:
- List your debts by interest rate, starting with the highest.
- Make minimum payments on all debts except the one with the highest rate.
- Allocate extra funds toward the highest-interest debt until it’s fully paid off.
- Move to the next highest-interest debt and repeat.
Who It’s For
- Perfect for those who are disciplined and focused on reducing total costs.
- Best suited for people who prioritize saving money over quick results.
Example:
- Debt 1: $1,000 at 25% interest
- Debt 2: $2,000 at 10% interest
- Debt 3: $5,000 at 5% interest
Start with Debt 1 (highest interest), then Debt 2, and finally Debt 3.
Pros:
- Saves the most money on interest.
- Reduces total debt faster.
Cons:
- Progress may feel slower, making it harder to stay motivated.
How to Choose the Right Method
The best debt repayment strategy depends on your financial personality:
- Choose Debt Snowball if you value emotional wins and staying motivated.
- Choose Avalanche Method if reducing overall costs is your top priority.
Additional Tips for Success
- Track Your Progress: Use a spreadsheet or app to monitor payments, interest, and balances.
- Stay Consistent: Stick to your plan and avoid missing payments.
- Avoid New Debt: Focus on paying down existing obligations without adding more.
- Create a Budget: Allocate funds specifically for debt repayment to avoid overspending.
- Celebrate Milestones: Reward yourself for significant progress to stay motivated.
The Key Takeaway
Debt can feel overwhelming, but with the right approach and discipline, you can achieve financial freedom. Whether you choose the Snowball or Avalanche Method, the most important step is to start—and stay consistent.
Need help creating a debt repayment plan? Reach out to us for personalized strategies and guidance to help you take control of your finances today!
