Snowball or Avalanche – Which Method Should You Choose to Stabilise Your Finances?
Money management seem to be terrifying and oftentimes is. Research has found that many people fail to be in control of finances despite earning a good amount of money. Overspending and inability to keep tabs on where and how much money is going is the most common reason for running out of money. Despite numerous suggestions made by financial experts, a few people successfully manage to stash away money for a rainy day.
Money management problems are prevalent among millennials. Since you do not cautiously spend your money, you end up feeling the pinch in the end, and some face worse circumstances – they end up falling into debt. Borrowing money is not a bad idea as long as you have a repaying capacity, but most of the people take out a loan without realising if they have enough money to pay it back.
It is mainly a problem with unemployed people. When an emergency pops up, you take out quick loans for unemployed only to find that you cannot pay it back. If you want to bring stability in your finances, you need to settle debts first.
Your first priority should be settling all dues and then creating a budget to start saving money so you do not fall into debt again. Well, now a question rises how you can settle your outstanding accounts as easily as possible. There are generally two methods: snowball and avalanche.
Before you choose between them, you need to know the difference and whether your financial condition allows you to opt for that. A snowball method involves you pay off your smaller debts first and then larger debts.
This method is generally suggested when you have little money. It is not possible to make large payments when you are in a tight spot and you can easily throw in the towel. Snowball method will improve your motivation level. As you continue to make payments, you will feel relieved from debt size.
This method allows you to start repayments of loans with high interest rates first. For instance, if you have a payday loan and door to door loans with no credit check, you will pay off payday loans first as they are more expensive. Technically, avalanche method is better than snowball because you will save a lot of money in interest. if you want to make most of your money, you should prefer avalanche method to snowball. However, it depends on your financial condition too.
Once you have settled your debts, the next step is to reboot your finances. Since you have settled all your debts, it does not mean that you will sit back. This is the time when you have to analyse what you need to do to make sure you do not repeat those mistakes again.
Track your past mistakes
Grab bank statements of a couple of previous months to see your total expenses. Segregate them into essential, discretionary and unnecessary expenses. Essential expenses will include utility payments, groceries, and the like. Discretionary expenses will include dining out, night out, and so forth. Unnecessary expenses include those that you made for the sake of it.
For instance, you bought a new cellphone despite the fact that your current phone was up and running. Knowing the nature of your expenses will let you know expected monthly spending. Make sure that you carefully spend your money in order to avoid falling into debt. Try to cut back on discretionary expenses and do not make unnecessary expenses just because you want to keep up with the Joneses.
Create an emergency cushion
Building an emergency cushion can prevent you from perpetually turning to direct lenders when you are running out of money. You cannot build it overnight. You will have to be consistent with it. try to set aside at least 10% of your paycheque, and it will be better if you link your pay account to savings account.
Make sure that you dip into savings account only when required. As long as your emergency cushion is six-month worth of living cost, you can manage to meet unforeseen expenses.
Stick to the plan
A good rule of thumb says that you should create a spending plan. As you receive your pay cheque, transfer a certain amount of money to your savings account and then make sure you cover all of your expenses with what you have all left.
Divide money for each category as it will let you have a feel of satisfaction. Having a spending plan can help you avoid overspending. However, you should try to stick to the plan.
You can bring stability in your finances if you spend money cautiously. Spend when necessary and save as much as possible. As far it is about settlement of debt, it depends on your financial condition whether avalanche or snowball will help you.