Paying off debt is one of the crucial steps in the journey for financial freedom, but many people struggle with the prospect and where to get started. When you have multiple debts, each with a different interest rate, you may wonder what is the best strategy to implement. The Debt Snowball and Debt Avalanche methods are two of the most popular approaches, so here we’ll explore these in greater detail to help you choose which one is best for you.
Debt Snowball vs. Debt Avalanche: At a Glance
| Feature | Debt Snowball | Debt Avalanche |
|---|---|---|
| Focus | Smallest balance first | Highest interest rate first |
| Psychology | Quick wins build motivation | Discipline required; fewer early wins |
| Steps | 1. List debts by balance 2. Pay minimums on all 3. Put extra funds toward smallest debt 4. Repeat until all debts are gone | 1. List debts by interest rate 2. Pay minimums on all 3. Put extra funds toward highest-interest debt 4. Repeat until all debts are gone |
| Pros | – Immediate sense of progress – Simpler to manage – Boosts motivation | – Saves the most money in interest – More efficient payoff – Can shorten total repayment time |
| Cons | – May cost more in interest over time – Larger debts take longer to address | – Progress feels slower – Fewer early wins – Higher risk of burnout |
| Best For | People who need quick wins to stay motivated | People who are disciplined and focused on minimizing total cost |
The Debt Snowball Method Basics
The Debt Snowball method focuses on paying off debts in a way that snowballs. You start with the smallest debt balance to start to generate momentum. By knocking out your smaller debts first, it is like a snowball rolling down a hill.
This method is grounded in psychology, as it emphasizes the motivational boost coming from small, early victories.
For example, imagine that you have three debt accounts; $1,000 on a store credit card, $3,000 on another credit card and a $10,000 personal loan. With the Debt Snowball method, you would focus on paying off the store credit card first. Once this is clear, the money that you needed for that debt will be “rolled” into payments on the other credit card.
It may seem complicated, but there are just four steps to implement the Debt Snowball approach.
4. List all Your Debts
Create a list of all your debt and ignore the interest rates. You should focus on arranging the list in terms of the smallest balance to the largest.
3. Continue Minimum Payments
While you want to focus on paying off your smallest balance first, you will still need to continue making the minimum payments across all your accounts. This will ensure that you stay current and avoid any penalties.
2. Divert Extra Funds
Allocate any extra money that you have towards paying off your smallest debt. Even small amounts can accelerate the timeline, but consider reducing your expenses or diverting any bonuses into paying down this balance.
1. Repeat
Once your smallest debt account is cleared, you then need to move on to the next smallest debt. Since you no longer have to make the minimum payment on the account you’ve just paid off, you should have more funds available to clear this account.
The Pros of the Debt Snowball Method
There are a number of advantages of the Debt Snowball method.
The Potential for Quick Wins
By paying off your smaller debts first, you can create immediate wins. These small victories are highly motivating and provide tangible evidence of your progress. They can also help to reduce the feeling of being overwhelmed by your debt.
Simplified Focus
Concentrating on one debt reduces the complexity of getting your finances in order. You don’t need to worry about calculating interest rates or other terms, you simply look at the outstanding balance of each account.
Less Management
Since you’re clearing the smaller balances first, there is less management of your debt. As you clear each of the smaller debts, you can close out the accounts and forget about them.
The Cons of the Debt Snowball Method
As with any approach, there are both advantages and potential disadvantages. Here are some of the drawbacks of the Debt Snowball approach.
Higher Interest Costs
Since this method does not prioritize debts by the interest rate, you could end up paying more over time. You may have high interest debts that linger, accruing more interest charges.
Slower Progress for Larger Debts
Larger debts are tackled later in the approach, so they will take longer to pay off. This can feel frustrating if your overall goal is to quickly eliminate your major financial obligations.
Potential for Accumulation
This follows on from the previous point, but by focusing on your smaller debts, you may allow any larger, high interest balances to grow due to compounding interest charges. Over time, this may significantly increase the total amount you owe, extending the payoff period.
The Debt Avalanche Method Basics
The Debt Avalanche method places focus on paying debts according to the interest rate, starting with the highest. The rationale behind this approach is simple; by tackling high interest debts first, you can minimize the total amount of interest you pay. This is a mathematically optimal way to save money and can deliver faster overall debt repayment compared to Debt Snowball.
With the same example as before, the $1,000 store credit card at 18%, the $3,000 credit card at 22% and the $10,000 personal loan at 5%. The Debt Avalanche method would target the $3,000 credit card balance first, as it carries the highest interest rate. Once this is cleared, you would move on to the store credit card before tackling the personal loan.
This may seem like more work, but there are still just four steps to implement the approach.
4. List All Your Debts
You’ll need to list all your outstanding debts, but you will also need to note the interest rates. Order your list by highest to lowest interest rate.
3. Continue Minimum Payments
As with Debt Snowball, it is still crucial to continue making the minimum payments on all your accounts.
2. Divert Extra Funds
Once you’ve paid the minimum amount due on each account, divert any extra funds towards the debt with the highest interest rate. Your goal is to reduce interest accumulation as quickly as possible.
1. Repeat
Once your highest interest debt is cleared, move on to the next highest, repeating until all your debts are paid off.
The Pros of the Debt Avalanche Method
There are significant advantages of the Debt Avalanche method.
Lower Total Interest Cost
By targeting your high interest debts first, you will reduce the overall interest you pay. Over time this can save thousands of dollars, making it a more cost effective option.
Financial Efficiency
This approach is mathematically optimal, as you can pay off your debts with the least amount possible. If you’re comfortable with a long term plan, Debt Avalanche will maximize your financial gains.
Faster Debt Elimination
By minimizing your interest charges, you can shorten the total repayment period. While larger debts will take time to pay off, the reduced interest costs will accelerate your overall progress.
The Cons of the Debt Avalanche Method
Despite some great advantages, there are some potential downsides to using the Debt Avalanche method.
Delayed Gratification
Paying off larger high interest debts can take months or even years, so there are fewer immediate wins. This can be demotivating if you thrive on visible progress.
Potential for Burnout
The lack of quick wins may lead to feelings of frustration or burn out. If you need continual motivation, you may struggle to stick with the plan.
Requires Discipline
This follows on from the previous point, but you will need to maintain your commitment for a long period. So, you’ll need strong financial discipline.
Debt Snowball vs Debt Avalanche: Which is Best?
As you can see, there are both pros and cons to each approach, so you will need to think about which method is best suited to your goals and personality.
If you’re the type of person who needs quick wins, and you struggle to stay motivated, the Debt Snowball is likely to be the best approach for you. The small victories that you get from paying off your smaller debts first should boost your confidence and help you to keep moving forward.
You should also feel a greater sense of psychological relief. Seeing your debts disappear will provide relief from your financial burdens, reducing stress and making your debt repayment journey feel more manageable.
The Debt Snowball method is also a good option if you have several smaller debts, as it will allow you to quickly eliminate these obligations.
However, if you have large, high interest debts and you’re financially disciplined, the Debt Avalanche method may be a better option for you. You can reduce your interest costs as quickly as possible and reduce the overall amount you need to repay.
The Debt Avalanche method does offer greater financial efficiency as you tackle your high interest debts first, which saves money in the long run. It can also help you from feeling demotivated as you can see the overall balance decreasing.
For example, if you have a large high interest debt and can only pay an extra couple of hundred dollars a month, under Debt Snowball, you may be able to significantly reduce the balance on your smallest debt, but if you then accrue $200 in interest charges on your largest debt, you’ll not have made any real progress that month.
Real World Examples
If you’re still unsure about which method is best for you, it may be helpful to put the strategies into practice with some real world examples. Please note that these are not real people or real numbers, simply practical examples to give you a better understanding of the processes.
Sarah, 28 Year Old Marketing Professional
Sarah has the following debts; $600 at 20% interest on a store credit card, $1,200 at 0% for a promotional period for medical bills and a $4,500 personal loan at 10%. She has $300 available each month to put towards her debt repayment plan.
With the Debt Snowball approach, Sarah would start with her $600 store credit card. She can clear this is just a few months, gaining momentum and confidence. When this card is cleared, she would direct the payments to her medical bill. Even though there is a 0% interest rate, she gains a psychological win by paying it off quickly. Finally, she is able to move on to clearing her personal loan.
With the Debt Avalanche approach, Sarah would still start with the store credit card, since it has the highest rate. She would then move on to the personal loan to minimize the interest charges. This approach will save her a little, but it may feel less satisfying in the first couple of months as her first debt will take longer to pay off.
So, since Sarah has several smaller debts, the Snowball Method may be the better option, unless Sarah is prioritizing minimizing interest costs over psychological motivation.
John, 35 Year Old Engineer
John has the following debts; a store credit card with an $8,000 balance at 22%, a credit card with a $15,000 balance at 5% promo rate and a $25,000 personal loan at 7%. He has an extra $500 per month for his debt repayment plan.
With the Debt Snowball method, John would first concentrate on his store credit card. Once this is cleared, he would focus on the credit card before moving on to the personal loan. This approach would offer psychological wins, he would end up paying more in interest over time because the credit card and personal loans carry substantial balances.
Using the Debt Avalanche approach, John would still start with the store credit card, before moving on to the personal loan and finally the credit card. By tackling the higher interest accounts first, he minimizes the total amount of interest paid, potentially saving thousands of dollars.
Lisa, a 32 Year Old Teacher
Lisa has three debt accounts; a credit card with a $2000 balance at 18%, a $500 medical bill at 0% and a $20,000 personal loan at 10%.
With the Debt Snowball approach Lisa would concentrate on quickly clearing the medical bill for an immediate sense of accomplishment. She would then tackle the credit card before moving on to the personal loan. This approach may help Lisa to stay motivated, as she can experience regular wins.
However, if she were to use the Debt Avalanche method, Lisa would be able to save considerable interest charges, as she would start with the credit card at the highest interest rate of 18%. She would then move on to the personal loan, leaving the 0% medical bill until last. While she wouldn’t get the immediate small win, the overall repayment total will be significantly reduced.
Tips For Maintaining Your Debt Repayment Plan
Whether you choose Debt Snowball or Debt Avalanche, you’ll need organization, discipline and motivation. However, there are some tips that can help you to stay on track and maximize your chances of becoming debt free.
Set a Clear Achievable Goal
One of the most important steps of maintaining any financial plan is to define clear goals. Break any larger debts into smaller milestones. For example, if you need to pay off $20,000 of debt, set incremental goals, such as clearing $5000. These milestones will allow you to feel a sense of progress, helping you to maintain your motivation in the medium to long term.
Create an Accurate Budget
Budgeting is the foundation for any successful debt repayment strategy, so it is important that your budget is detailed and accurate. Go through your monthly income and expenses carefully, identifying any areas where you can reduce your spending. Allocate these savings towards clearing your debts. Be sure to keep your budget on hand and track your spending, so you can make sure that you stay on track.
Automate Your Payments
Automation helps you to avoid missing payments, which is crucial for maintaining your momentum, reducing fees and protecting your credit score. Set up automatic payments for the minimum amount due on all your accounts. You may be able to also automate the extra payments towards your target debt account.
Regularly Track Your Progress
Keeping track of your progress can be highly motivating. Whether you use a mobile app, spreadsheet or debt tracking website, a visual representation of your payments, balances and milestones can provide motivation when you’re feeling frustrated.
Adjust for Life Changes
Life can be unpredictable, so there may be issues that temporarily affect your repayment plan. So, it is important that you adjust your strategy rather than completely abandon it. For example, if there is a medical emergency, be sure to maintain minimum payments on your accounts and once your circumstances stabilize, you can resume the plan.
Don’t Accumulate New Debt
While you’re paying off your existing debt, you should avoid accumulating any new debt. Use your credit cards responsibly, maintain an emergency fund and have disciplined spending to help prevent backsliding. Try to treat your debt repayment as a lifestyle shift rather than a temporary fix.
Celebrate Milestones
Rewarding yourself when you achieve milestones can help you to maintain your motivations. These rewards need not be extravagant, something as simple as a favorite meal or a movie night can help you to celebrate the achievement.
Both the Debt Snowball and Debt Avalanche methods offer a structured approach to repaying your debt. The choice between them depends on your personality, financial goals and tolerance for delayed gratification. The most effective strategy will be the one that you can commit to consistently.
Remember that you can switch between methods or even combine elements of both. For example, you could start with a small debt to gain momentum before switching to your high interest debts to maximize savings.
Regardless of the method you choose, the key is to develop a clear plan, stay consistent and maintain your focus on the ultimate goal of becoming debt free.
