Plan for an ‘avalanche’ or ‘snowball’ to take control of your finances

Job loss, unexpected medical expenses or poor financial management can lead you to irrecoverable debt.

If you’re at the stage where you can’t cover your daily expenses, you’re struggling to pay your credit cards and utility bills, it’s time to create a debt management plan to help you keep your personal finances healthy.

There are two methods that can help you achieve that stability, this is the plan “snowball” and “avalanche”.

For Jessica Chavezfounder and director of the company Finances with youBefore starting a debt settlement plan, the first thing a person must consider is to stay current with all their financial obligations or their debtors, as unpaid bills can delay the process.

He explained that you need to be clear about what is yours financial scenarioknow the cost of your life in terms of personal and financial obligations, among others.

“This will allow you to know how much excess money there is to create a plan ‘snowball’ or from ‘avalanche’“, he added.

The expert recommends that you know exactly who your creditors are and make a list of their financial obligations.

That list includes credit cards, personal loans, informal lendersfamily loans, also the electricity bill, if you have arrears and a payment agreement.

Snowball plan

Plan “snowball” it consists of quick wins in the debt relief process, Chávez explained.

“For a snowball plan, you start with what you owe the least, regardless of the interest they charge you for it. It’s listed from the lowest balance to the highest,” he said.

In addition, you need to consider how much you owe, who you owe it to, when you started that financial obligation, and what the estimated date is when you must complete the payment.

“When you know what the minimum payment is, then you order it from the lowest to the highest,” he added.

He explained that you then have to diversify the extra money within your budget, although he admitted that it’s a little difficult to get it when you don’t have enough money.

Therefore, he recommends trying cut the budgetsee where you can save, be it on the supermarket, water, electricity, and opt for the cheapest internet and cable TV.

You can also earn money by saving, selling something, working extra hours at work or working double shifts.

He added that that extra money will go toward that first debt as an outstanding payment until you pay it off.

It is important that you will never stop paying any obligation, whether it is the minimum payment on credit cards, you will always pay the letter that suits you, he explained.

After paying off the first debt, you will have cash flow, which will increase because the monthly payment of the first debt is freed up.

After you have written off the first debt, you will pay the same amount on the second debt, and so on.

“avalanche” plan

The “avalanche” plan doesn’t measure your debt list based on the lowest balance, but on which of all your debts you pay the highest interest on.

For this method, in the same way, a list of debts must be made in order from the highest to the lowest interest rate.

What is required is to cancel the highest interest debts so that it does not affect you in the long run.

Between these two methods for settling debts, Chávez recommends 100% the “snowball” plan, because he considers it more effective, because human beings are always inclined to seek rewards and quick victories are achieved with this method.

It is not recommended to combine the two methods as it will cause confusion and disorder. “Either one or the other, not both at the same time,” he said.

In order not to get into too much debt, the expert on financial markets advises developing the habit of saving money, preparing for unexpected events, and when you have debts, try to reduce them.

According to Chávez, in some cases debt consolidation is not an immediate solution, because since the root of the problem, which is related to consumer habits, has not been solved, it is likely that the same scenario or more indebted people will return in the shortest possible time.

“What we have to work on is our behavior towards money,” he added.

The speaker also stated that after the pandemic COVID-19there are many people with outstanding debts and it is recommended that if you have a debt in the legal department that you contact your creditor before starting a debt settlement plan so that you can start with an effective plan.

Encourage people to take the proposal to their financial institution to establish a minimum payment so you can include it in your plan “snowball” or “avalanche”.