Snowball vs. Avalanche – What is the Best Way to Pay Off Your Debt?

I have not paid any interest on debt for several years, outside of my mortgage. That is because I have not had any debt for several years. But this wasn’t always the case.

I, like many Americans, struggled with debt for many, many years. I never really dealt with it even though it always bugged me. My strategy was always to just make payments and always strive to earn more money as my career progressed.

I never really had a plan to pay my debt off. I was just focused on ways to live with it.

The problem with a half-hearted plan such as this is you never really deal with the debt. When I would get those end-of-year statements showing how much interest I was paying, it was clear I was wasting a lot of money.

I needed a real strategy, not just a way to cope.

What I Finally Did

I employed a specific strategy that worked for me. After I had paid off my debt I found out that this strategy actually has a name: The Snowball Strategy.

Two Different Strategies to Paying Down Debt

There are two prominent strategies for paying down debt. To me they have one significant characteristic that separates them and determined why one worked for me better than the other. I suspect that this characteristic may determine which one works better for you as well.

What is this difference? One of these strategies is rational and one is emotional.

The Snowball method is the emotional approach while the Avalanche method is the rational approach. Surprisingly enough, while I consider myself more on the logical/rational side in most respects, when it came time to pay off debt, I really needed the emotional approach.

Snowball Method – The Emotional Approach

The snowball method of paying off debt is when you do the following:

• Make minimum payments on all of your debts.
• Then take any extra money you have left over and pay it towards the smallest debt.
• Once that small debt is paid off, you then take the extra money and the monthly payment from the smallest debt and put all of that towards the next smallest debt.

This will hopefully result in paying off the smallest debt rather quickly which will, in turn, give you an early victory and a feeling of accomplishment. It is this quick feeling of accomplishment and the resulting momentum that gave me the motivation to keep paying down my debt. And trust me, I needed that momentum.

It wasn’t until after I paid off my debt that I discovered this is an established method that was originally proposed by financial guru Dave Ramsey and later espoused by Robert Kiyosaki.

Avalanche Method – The Rational Approach

The avalanche method of paying of debt also requires you to make minimum payments on all of your debt. How this strategy differs is in how you apply any extra money you have.

With the avalanche method, you would take any extra money you have and plow it into payments on the debt with the highest interest rate, not necessarily the debt with the smallest balance. Why would you do this? Because the highest interest rate is costing you the most money in the long run. By paying off your debt with the highest interest and then progressing towards the debt with the lowest interest rate, you should be paying the least amount of money overall.

What the Numbers Look Like – Avalanche Method

Here are some hypothetical numbers for us to look at.

• Credit Card A: $8,000, 18% APR, $180 monthly payment
• Credit Card B: $4,000, 15% APR, $85 monthly payment
• Car Loan: $10,000, 6% APR, $420 monthly payment
• Student Loan: $20,000, 8% APR, $145 monthly payment

The total monthly payments in this example are $820. Suppose you have $1,100 per month to pay towards your debts. This would mean that after making your minimum payments you would have $280 left over. With the Avalanche method you would put that extra $280 towards paying down Credit Card A, since it has the highest interest. Then you’d move on to credit card B then the student loan and finally the car payment.

The order of payoff under the Avalanche method would look like this.

1. Credit Card A: $8,000, 18% APR, $180 monthly payment
2. Credit Card B: $4,000, 15% APR, $85 monthly payment
3. Student Loan: $20,000, 8% APR, $145 monthly payment
4. Car Loan: $10,000, 6% APR, $420 monthly payment

What the Numbers Look Like – Snowball Method

If we were following the snowball method our order of priority would be different.

1. Credit Card B: $4,000, 15% APR, $85 monthly payment
2. Credit Card A: $8,000, 18% APR, $180 monthly payment
3. Car Loan: $10,000, 6% APR, $420 monthly payment
4. Student Loan: $20,000, 8% APR, $145 monthly payment

With the Snowball Method you would also make minimum payments on each debt, but you would put that extra $280 towards paying off Credit Card B since it has the smallest balance. Adding $280 to the $85 minimum payment would definitely accelerate your progress towards paying off the $4,000 balance quickly.

The Research

Once I decided to write this article, I discovered there is research out there conducted by the Kellogg School of Management, Harvard Business Review and others. Their research supports the snowball method. The findings state that if you focus on paying one bill off at a time and focus on the smallest debt first, most people will have a better chance of success.

According to the Harvard Business Review (December 27, 2016) “Our research suggests that people are more motivated to get out of debt not only by concentrating on one account but also by beginning with the smallest.”

Conclusion

Despite all of the above, you should try to determine which method will work best for you. Look closely at your numbers and honestly assess what the financial cost will be in interest as well as assessing your own level of determination. Perhaps the Avalanche method will work better for you, resulting in less interest paid. Or perhaps the Snowball method works best for you, providing you with early victories and a boost to your motivation.

Either way, I wish you luck.