Debt Snowball vs. Debt Avalanche: What’s Right for Me?

Debt Snowball

The Meaning: A debt reduction strategy where you commit to paying off your balances from smallest to largest.

The Method: Paying the minimum on each of your credit accounts except the smallest balance, which you try to pay off as fast as your monthly budget allows.

The Benefits: The ability to experience positive psychological effects of paying off debt.

 

Debt Avalanche

The Meaning: A debt reduction strategy where you focus on paying off your balances with the highest interest rates first.

The Method: Pay the minimum due on each of your balances except the one with the highest interest rate, which you try to pay off as quickly as your monthly budget allows.

The Benefits: You’ll reduce the amount of interest you pay on your debts.

 

Methods for Paying Down Your Debt

If you’re in debt, you’re not alone. Credit card debt in America has reached an all-time high. In June, Americans hit $1.21 trillion in revolving debt, surpassing the previous high of $1.20 trillion reached in April 2008 before the Great Recession. With all the issues we’ve faced since then, it would be reasonable to wonder how we could have found ourselves in this position again.

So why are consumers are spending so much today? It could be due to a major financial hardship. It could be because interest rate hikes are causing less to be paid on principal balances. Some people are spending more simply because they can.

However, Sean Fox, co-president of Freedom Financial Network thinks the cause could be due to necessity. “Since 2003, household incomes have increased by 28%; the cost of living has climbed by 30%. While the gap does not seem large, some speculate that it is a driving force for people to turn to credit cards to cover the gap.” Fox went on to say, “While more people are employed, with the unemployment rate hitting its lowest point in years, they are not earning more.”

Increased spending doesn’t end with plastic either. Americans also had $1.17 trillion dollars in auto loan debt during the first quarter of 2017. This is an increase of over 82% from 2003. Let’s face it, Americans have a debt problem with credit cards, automobile, and even rising student loan debt.

Now is the time to reverse the trend.

While most people understand what has caused them to get into debt, many don’t know how to construct a debt elimination plan, helping them wipe out debt for good. That is where the debt avalanche and debt snowball methods come into play. While these debt payoff methods are fairly similar, there is a major difference. Let’s explore further.

 

What is the Debt Snowball Method?

The idea behind both the debt snowball and debt avalanche methods is that you work on small goals to achieve your larger goal of paying off all of your debt. Your first goal with both methods is to ensure you have two things in place:

  • You’ve established a basic monthly budget
  • You are current on all of your bills, and
  • You have an emergency fund in place

Next, you’ll write down all of your debts, from smallest to largest, then begin paying the minimum required payment on each balance except the one with the lowest balance. (You can use our handy, printable debt snowball worksheet to help you do this.) With that one, you’ll put as much of your monthly budget as possible toward paying it off as quickly as possible. The goal is to pay off this smallest balance first, giving you a sense of accomplishment you can carry forward to your next goal. (Pro tip: It can help to put away the credit card you’re working on paying down until you’ve eliminated that debt. Not having it in your wallet will keep you from using it.)

As an example, let’s say that you have a $3,468 credit card balance, another $673 credit card balance, and $16,847 in student loan debt. When using the debt snowball method, this is how you will attack your debt.

  • Focus on the credit card with a balance of $673. You are going to put everything left over in your monthly budget toward this, until it’s gone.
  • Pay the minimum payment on the $3,468 credit card bill until the first credit card is paid off; plus
  • Pay the minimum on the $16,847 student loan until both credit cards are paid off.

Once the entire balance of the $673 credit card bill is paid off, you will then move your focus to the next smallest balance, the $3,468 credit card. You will keep doing this until all of your debts have been paid off completely.

Debt snowball is a popular method for many people because it helps provide quick victories. There are a couple of downsides to attacking your debt this way, however. In most cases, it will take longer to complete your overall objective and it could also cost you more in interest.

“Money is emotional! It’s the reason why we’re in debt in the first place. The debt snowball harnesses our positive emotions and uses them to propel us towards success,” says Christine Luken, certified financial coach at christineluken.com. “When we attack our smallest debt with a vengeance, we achieve a quick victory, and it keeps us pumped up. Our monthly pile of bills starts to shrink and we feel encouraged to stick with the process.”

Of course, not letting your credit card balances grow once you’ve completed this process is important in remaining debt free. That’s where that emergency fund comes in. Once you’ve save that up, you won’t have to overspend on your credit cards because of emergencies. You’ll be able to pull directly from this savings account to cover any unexpected expenses.

 

What is the Debt Avalanche Method?

While the Debt snowball method focuses on paying off the smaller balances first, the debt avalanche is all about the numbers. Instead of prioritizing your debts by their balance, you are going to prioritize them by their interest rate.

Think of it this way: A snowball rolling downhill will gradually grow, picking up momentum as it makes it’s way down the mountain.The same goes for the debt avalanche method. You will start by focusing on paying off your balance that has the highest interest rate, paying the minimum payment on the rest. This will lead to paying off the most costly debt as fast as possible.

As an example let’s assume the $3,468 credit card bill has an interest rate of 12.99%, the $673 credit card bill is 7.99%, and the $16,847 student loan is at 6.49%. With the debt avalanche method, you would prioritize your bills like this:

  • Focus on paying off the credit card bill with a balance of $3,468, because it has the highest interest rate,
  • Pay the minimum balance due on the $673 credit card bill until the other credit card is paid off, then prioritize paying off this balance, and
  • Pay the minimum balance due on the $16,847 student loan until both credit card balances are paid off

While the debt avalanche approach won’t get you the quick, motivating victories that the debt snowball method does, the debt avalanche will help you save money by eliminating your debts with the  highest interest rates first. That means you’ll end up paying less total interest.

“The debt snowball method provides gratification, and it’s exciting to see a loan paid off,” says Sharon Weaver, President of Mission Financial Planning. “But when we run debt avalanche numbers compared with debt snowball, we see the significant savings when clients tackle the high interest rates first. That’s some pretty exciting gratification too.”

The debt avalanche method can also be advantageous during a period of rising interest rates. Each time the federal reserve raises rates, variable rate loans, including credit cards, can rise. This makes borrowing costs more expensive.

 

Debt Snowball vs Debt Avalanche: What’s Right for Me?

If you want to free yourself from debt, whether it’s from credit cards, auto loans, or something else, both the debt avalanche and debt snowball methods will help you pay down your debt. It really boils down to your personality traits and spending habits as to which will work best for you.

The debt snowball is going to provide you with quick wins to keep you motivated, whereas the debt avalanche is going to help you save more money in the long run. If you are the type of person that needs motivators, then the debt snowball might be the way to go. If keeping more money in your pocket is all the motivation you need, then the debt avalanche might be best for you.

In the end, there is no right or wrong way to pay off debt. Pick the method that works for you and stick with it. By doing so, you will find yourself living a debt free life before you know it.

[Editorial Disclosure: PayDownMyDebt.com is a service that provides people with tools to pay down their debts through automatic payments. The purpose of this article, however, is not to encourage users to purchase that service. This article is educational and journalistic in nature and aims to help people learn how to pay down their debt, whether they use our site, another, or go it alone.]