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Debt Snowball FI

Debt Snowball vs. Debt Avalanche: Which is Better?

April 25, 2018

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We’ve all been told that we need to pay down debt, but when you’re first getting started you may feel overwhelmed by exactly how to go about doing so. This is especially true if you have debt spread across multiple loans and credit cards.

While you could just grab a stack of bills and start paying them, this isn’t necessarily the best way to go about reducing your debt strategically.

With this method, you could end up paying on some bills that aren’t due yet, while other critical bills are left unpaid because you ran out of money before making your way to the bottom of the stack.

I know, because this is exactly what happened to me before I made a solid strategy to pay off debt.

But, there is a better way than this willy-nilly method of paying debt. In fact, there are a couple of proven ways that can help you both prioritize your debt and reduce it.

One is called the debt snowball and another is known as the debt avalanche. But which is better?

First, we’ll take a look at each of them to help you understand exactly how they work so you can choose which one is right for you.

The Debt Snowball

The debt snowball was popularized by personal finance guru, Dave Ramsey. It’s his chosen and recommended method for paying off debt with quick wins to help build momentum.

How it Works

The debt snowball starts with gathering information about what you owe to who. Gather all of your bills so you can make a list of showing each debt balance and their monthly minimum payment.

Don’t worry about the interest rate because this payment method doesn’t take those into consideration. Instead, list them out by balance from smallest to largest.

Here’s an example:

CreditorBalanceMinimum PaymentMonthly Payment
Credit Card$1,000$35As much as possible! (Example: $100)
Student Loan$5,500$100$100
Car Loan$12,000$250$250
Mortgage$110,000$850$850
TOTAL$128,500$1,235$1,300

With the debt snowball, you’ll pay only the minimum payment on your mortgage, car loan, and student loan. But, you’ll aggressively pay as much as you can toward your credit card every month until it’s paid off.

Related Post: 9 Smart Tips to Pay Off Student Loans Faster

In this example, let’s say you picked up a side hustle and are able to pay $100 per month toward your credit card debt.

After about 10 months (or a little longer due to interest), you get that paid off. Congrats!

With that first bill out of the way you have started the snowball rolling. Now you’ll roll that payment toward your next debt. Here’s an example:

CreditorBalanceMinimum PaymentMonthly Payment
Credit Card$0$0$0
Student Loan$4,750$100$200
Car Loan$10,000$250$250
Mortgage$106,000$850$850
TOTAL$120,750$1,200$1,300

As you can see, you have your credit card paid off and that $100 is added to the $100 you were already paying toward your student loan, so you are now paying $200 toward your student loan.

All of your debt balances are lower because you were paying of them with the minimum payment during the past few months while you aggressively attacked your credit card.

Once you have started the snowball rolling the amount you pay toward the next debt gets larger and larger. At the same time the debt you owe gets smaller and smaller.

Here are a things to keep in mind about the debt snowball.

It Makes Paying Easy

The debt snowball method is not at all complicated. There are no magical formulas or difficult computations. All you have to do with your debts is list them by balance and pay the minimums on everything except the smallest one.

It Can Help Keep You Motivated

As you see your debts being paid with this debt reduction process it can be a psychological boost. The one by one elimination of each debt feels like a triumph. This builds up the momentum for you to pay off even more debt. You’ll get a quick win at the beginning as you pay off your smallest debt.

It Isn’t as Helpful If You Have Fewer, Larger Debts

When you have only a few debts that have much larger balances, this method is somewhat less effective. The reason for its lack of success in those situations is because the larger the debt the longer it takes to pay off. This makes it harder to stick with the plan until debts are paid off which is a drawback to using this method.

Takes Longer to Get Everything Paid

One of the drawbacks of using the debt snowball technique is that it can make paying off your debt take longer. Since you may not be paying off the debts with the highest interest rates, the interest on your debt will continue to accrue. Using another popular method, the debt avalanche, can help you pay off your debt a little faster.

The Debt Avalanche

How it Works

A second debt strategy you could choose is the debt avalanche. To get started with this method you would also make a list of everything you owe including minimum payment amounts and total balances owed.

But, with this strategy, you also want to include the interest rates of your debt. Your interest rate should be listed on your account statements, but if not, you can call your creditors to find out.

When you pay your monthly bills, you will still only pay the minimum on each one with the exception of one of them. Instead of focusing on the smallest balance, you will focus on the debt with the highest interest rate.

Here’s an example:

Let’s say you have the same debts as before, but your credit card is currently at 0% interest. Here’s what your debt plan would look like.

CreditorBalanceMinimum PaymentMonthly Payment
Credit Card$0$0$0
Student Loan$4,750$100$200
Car Loan$10,000$250$250
Mortgage$106,000$850$850
TOTAL$120,750$1,200$1,300

After your student loan debt is eliminated, you can apply the same process to the debt with the next highest rate of interest. Just like an avalanche, a bigger chunk of your debt falls first, allowing you to pay your total debt off at the fastest rate.

It Saves You Money

As you pay down your debts using the debt avalanche, you are obviously paying quite a bit less interest. If you’re highly motivated by saving money, this can make it seem like the better choice.

Doesn’t Improve Your Monthly Cash Flow as Quickly

One disadvantage to using the debt avalanche is that it may not improve your monthly cash flow as quickly as the snowball method can. Because it is likely you are paying on a larger debt balance, you have to continue making the larger payments for many months or even several years to see results.

If you have lots of balances, the debt snowball may be a better choice, at least to start with.

It Allows You to Pay Debt Faster

Because you pay less interest using the debt avalanche, you are able to achieve financial freedom faster. The interest you are saving will eventually reduce the overall length of time you’ll be in debt.

Isn’t Always Easy to See Results

Again, you must remain committed to this debt repayment method over the long haul, even if it takes several years to see results. However, if you owe a very large amount on the debt with the highest interest rate, staying motivated to continue isn’t always easy.

You may feel like you are not progressing and get discouraged. This is one down side to using the debt avalanche method.

Making Extra Snowflake Payments

Along with these two popular methods of paying off debt, you can also use extra “snowflake” payments to make your progress even faster.

What it is and How it Works

Snowflake payments aren’t something that stand along. Instead, this is something you can pair up with either the debt snowball or debt avalanche method.

Snowflake payments are the occasional extra payments you make whenever you have extra cash that’s unaccounted for in your monthly budget.

For example, let’s say you over-budgeted for groceries this month by $10. Instead of using that $10 for something arbitrary, or leaving it in your budget for next month, just make a $10 payment toward the debt you are currently focusing on paying off.

Then, maybe later in the month you sell some stuff from around for your home for $40. When you get that money, make another payment toward your debt.

Just like snowflakes can add up to a huge snowstorm, these tiny payments add up and help you to pay off debt faster.

Here are a few benefits of making snowflake payments.

It Inspires You to Look for Extra Money

This additional debt payment practice can give you an extra boost and encourage you to look for other ways to save money or earn extra money to pay down debt. It feels good to lower your expenses and pay off what you owe.

It Helps Avoid Spending Temptation

If you seem to always spend your extra money, this method can help you avoid doing that. Instead of keeping that extra money and using it elsewhere, just make a snowflake payment immediately.

Which Method Should You Use?

There are definitely pros and cons to both the debt snowball and debt avalanche methods of paying off debt.

For one, if you have a lot of high interest debt you might want to consider the debt avalanche. This will help you get rid of the debt that is costing you the most money. But, you could always consider refinancing your high-interest debt with a personal loan from Credible to help you save money on interest too.

However, if you find it hard to stick with anything if you can’t see results, you might want to try the debt snowball instead. Once you see that you are eliminating some monthly payments, you will get the encouragement you need to keep going.

Personally, I’ve used a mixture of both while paying off my debt over the years. I started with the debt snowball method to help me pay off a few small balances quickly. After my small balances were paid off, I switched to the debt avalanche to help me save more money on interest.

No matter which method you use, the key is to have a solid strategy. If you don’t have a strategy for paying off your debt, you’ll likely end up feeling frustrated at a lack of progress. But remember, it’s ok to change strategies as your finances and life change over time. Just make sure you’re still making forward progress because we all deserve to be debt free!

Which of these strategies are you using? Why?

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6 responses to “Debt Snowball vs. Debt Avalanche: Which is Better?

  1. Right now I’m working on paying down debt from a few emergencies I’ve recently dealt with. Lucky for me I am using both methods at the same time as my smaller amount is on my higher interest credit card, and the bigger balance is on my low interest line of credit.

    In addition to my regular payments I’ll be re introducing my $10 a day payment plan, where I try to squeeze an additional $10 a day from my spending money to put additional payments down.

    1. That’s a really great goal to have to pay off debt quickly – $10 a day, one day at a time! It’s good that your higher interest card holds the smaller debt too. I hope you are able to take reach your goals and achieve greater financial freedom!

  2. Some time ago I made a blog post / web app that compared the difference between the snowball method and avalanche method of paying off debt. In trying to find example data to test the app part of the blog post, I found that for most people, the debt with the smallest balance tends to have the highest interest anyway, so there isn’t much difference between the two.

    I believe that the “better” one is the one that you can stick too. If doing one over the other increases the odds of someone “giving up” then it might not be worth it.

    And I love the use of the phrase “extra snowflake payments” – I definitely do a bunch of these but never had a way to refer to them with the snowball / avalanche metaphors!

    1. I completely agree that the best method for each person is the one you can stick to. After all, if you aren’t sticking with it the debt isn’t going to go away.

  3. I think the debt snowball was better at first because paying off those “little debts” really helped boost my morale on paying debt. However, the debt avalanche worked better long term, because I was paying off higher interest debt a lot quicker (thus saving money). I think if you get discouraged easily, starting with the debt snowball is the way to go. It’s crazy how big of a difference paying off a small debt makes your overall attitude about paying debt off better!

    1. That’s so true, Chonce, about the snowball method helping to keep your spirits and attitude up when paying down debt. Even though I know the avalanche method can save you money, there’s a lot to be said for the psychological benefits of the snowball method.

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