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Question 11

Managing consumer debt is one of the most emotionally charged parts of personal budgeting. For decades, household debt dynamics have shaped how people plan: in the 1980s and 1990s, easy access to credit cards and aggressive marketing normalized carrying balances; in the 2000s, rising awareness of interest-costs and the financial crisis pushed many toward structured repayment plans. Two well-known tactics emerged in popular personal finance writing: the “debt snowball” and the “debt avalanche.” The snowball builds psychological momentum by paying off the smallest balance first, while the avalanche minimizes interest paid by tackling the highest-rate debt first. Both methods require discipline and prioritization — listing balances, deciding extra-payment amounts, and resisting new debt. Behavioral economists emphasize that the psychological wins from early small payoffs (snowball) often increase the likelihood of sticking with the plan, even if mathematically the avalanche saves more interest. For budgeting, the chosen repayment method affects cash-flow planning, emergency buffers, and how aggressively you can allocate future income to savings. This question asks you to identify the method prized for its momentum-building payoff psychology.

Which debt-repayment strategy focuses on paying off the smallest balances first to build momentum, even if it may not minimize total interest paid?

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By Wise Wallet

Health Savings Accounts provide tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical costs.