Debt Snowball vs. Debt Avalanche: What to Choose when Paying off Debt
Updated: June 28, 2020
The first stage of financial independence and building wealth is eliminating debt. Most people choose one of two strategies: debt snowball vs. debt avalanche. Before you choose a side, you should do one pre-debt elimination step: list all your debts so that you can visually see what they’re costing you. Then you can begin selecting the method that works best to eliminate your debt.
What Is Debt Snowball?
Debt snowball is a technique that uses human psychology to keep you motivated. You assess all your debts, then begin by paying off the smallest debt first. This small win propels your momentum to pay off the next smallest debt, and so on. The constant successes act as an incentive that keeps you going until all the debt is paid off.
Let’s say you have three debts that need to be paid.
- A $3000 credit card bill with a $30 minimum monthly payment
- A $7500 line of credit with a $225 minimum monthly payment
- A $12,000 personal loan with a $360 minimum monthly payment.
You would pay the minimum monthly payment on each loan. Any excess cash available should be applied towards eliminating the $3000 credit card bill first. If you have $1000 available, $585 would be used to pay the line of credit and personal loan minimum payments. The remaining $415 would be applied to the credit card bill.
After eliminating the credit card bill, the monthly $1000 would be split into the minimum personal loan payment ($360) and the line of credit payment ($640). Once the line of credit is paid off, the entire $1000 can be put towards the personal loan.
The biggest benefit of this method is the psychological impact. Seeing the success of your efforts (debts being paid off quickly) encourages you to keep going. It may inspire you to put more effort into debt repayment. Even better, once you are debt-free, you can use this mentality to supercharge your savings.
The disadvantage of using this method is that the smallest debt may not be the most expensive. It may take a while to get to the point where you can aggressively attack high-interest debt. This may stretch the debt elimination plan by years. During this time, you will be left paying substantial interest on this high-interest debt.
What is Debt Avalanche?
The debt avalanche is a variant of the debt snowball method that focuses on higher interest rates. It uses the fact that loans with higher interest rates are more expensive. This determines the highest priority loans to pay off. So instead of diverting excess money to the smallest loan, you apply it to the loan with the highest interest debt first.
Using a different example, let’s say you have three debts that need to be paid.
- A $3000 personal loan at 9% interest with a $100 minimum monthly payment
- A $5500 line of credit at 19% interest with a $140 minimum monthly payment
- A $10,000 credit card at 22% interest with a $300 minimum monthly payment.
With the debt avalanche method, you would target the $10,000 credit card debt due to the highest interest rate. If you had $1000 available, you would make the monthly minimums on the personal loan and line of credit. This would cost $240. The remaining $760 would be used to aggressively pay against the credit card debt. The first $300 would cover the minimum, the remaining $460 would go to paying off the principle of the debt. Once the credit card debt is eliminated, you would focus the remaining money on eliminating the line of credit. It is now the debt with the highest interest rate.
The benefit of using the debt avalanche method is twofold. You will achieve debt-free status quicker and pay less in interest, assuming you are able to stay the course.
The disadvantage of this method is that you may lose motivation quicker. Unlike the debt snowball, the first few wins may be slow to come and far apart. While they approach slowly, you will need to keep focused on paying as time goes on.
Whether you choose debt snowball vs. debt avalanche, both methods can ultimately prove to be successful for paying off debt. Debt snowball is good for people who need quick wins to keep them motivated. Use debt avalanche if you can focus on the long game, where paying off expensive debt first is your incentive. Despite this primary drive, it can help keep you going if you celebrate a few mini-goals along the way. (For example, congratulate yourself after clearing off each $1000 in debt.)
This is my first Christmas that there will be no bills in January. Paying off debt feels great.
Go kick debt butt
Good on you, this is the best way as a lot of people get depressed in January with their credit card bill
I’ve been EXTREMELY strict about spending the last 2 months in attempts of paying off debts. I am skipping Christmas at my parents to save $170 in dog care costs, I’ll go up later in January when it’s not a holiday rate. I’m not buying anything extra, no clothes, I’m using up my toiletries, only the essentials. Christmas gifts will be very cheap for only 3 people I’m buying for. I’m projected to pay $700 of one of my debts by the end of the month. I’m aiming to throw $500 a month at debts in chunks until my car… Read more »
That is a good approach, instead of taking more on holiday stress actually take control over your finances. Good for you!
I like the snowball method just because of the faster “wins” that help build momentum and excitement/accomplishment. With that being said, when it came to where I had 3 loans that were basically the same amount I looked at the interest rate to pay the one with the highest rate. Mine were less that .5% different…so just picked one
Makes sense! Our 4 credit cards (we each had two and almost equal debt when we met) are all very close in balance so I see it might be better to do this way.
Mathematically avalanche is better, behaviourally Snowball. It does matter how big is the spread between the APRs you are paying.