When it comes to paying off debt, the Debt Avalanche and Debt Snowball methods are two popular strategies. Here’s what you need to know:
- Debt Avalanche focuses on paying off debts with the highest interest rates first, saving you the most money on interest over time. It’s ideal for those who are disciplined and want to minimize costs.
- Debt Snowball prioritizes paying off the smallest balances first, giving you quick wins to build motivation. It’s great for staying emotionally engaged in the repayment process.
Quick Comparison
| Factor | Debt Avalanche | Debt Snowball |
|---|---|---|
| Focus | Highest interest rates first | Smallest balances first |
| Motivation | Slower progress initially | Quick wins early on |
| Interest Savings | Saves more on interest | May cost more in interest |
| Best For | Budget-conscious, disciplined | Those needing frequent motivation |
Both methods work, but the best choice depends on your financial goals and personality. If you want to save the most money, go with Avalanche. If you need small victories to stay motivated, choose Snowball.
How To Pay Off Debt (Debt Snowball vs Debt Avalanche)
Debt Avalanche Method Explained
The Debt Avalanche method is a debt repayment strategy that prioritizes tackling high-interest debts first. By focusing on these costly debts, you can reduce the total interest paid over time and save money.
Paying Highest Interest Rates First
The idea is simple: put any extra funds toward the debt with the highest interest rate while continuing to make minimum payments on all others. Once the highest-interest debt is paid off, roll that payment amount into the next debt with the highest rate.
Here’s an example to show how interest rates impact repayment:
| Debt Type | Balance | Interest Rate | Minimum Payment |
|---|---|---|---|
| Credit Card | $1,000 | 26% APR | $50 |
| Personal Loan | $1,250 | 12% APR | $50 |
| Line of Credit | $5,000 | 8% APR | $50 |
If you have $500 available each month for debt repayment, you’d pay the minimums ($150 total) on all debts and put the remaining $350 toward the credit card first.
Benefits and Drawbacks
Benefits:
- Reduces total interest paid over time
- Can shorten the overall repayment period
- Appeals to those who enjoy number-driven strategies
- Could save nearly $3,000 in interest when paying off a $5,000 balance within 12 months
Drawbacks:
- Progress may feel slow initially
- Requires discipline and patience to stick with the plan
- Large balances on high-interest debts can feel overwhelming
- May not provide the quick emotional wins that other methods offer
How to Start the Avalanche Method
Getting started with the Debt Avalanche method takes planning and commitment. Here’s how to set it up:
- List Your Debts: Write down the balance, APR, minimum payment, and due dates for each debt.
- Calculate Extra Funds: Determine how much additional money you can allocate to debt repayment. For context, Northwestern Mutual reports that the average American with debt spends 33% of their monthly income on it.
- Put the Plan Into Action: Pay the minimum on all debts and apply any extra funds to the debt with the highest interest rate. For example, adding just $100 extra each month to your highest-interest debt can significantly reduce both interest and repayment time.
"The debt avalanche method generally saves you the most on interest payments, particularly if you have loans with a wide range of interest rates. It may also help you pay off your loan faster." – Fidelity
Debt Snowball Method Explained
The Debt Snowball method is all about gaining momentum by tackling your smallest debts first, regardless of their interest rates. This approach contrasts with the Avalanche method, which targets debts with the highest interest rates first.
Paying Smallest Balances First
Here’s how it works:
| Debt Type | Balance | Minimum Payment |
|---|---|---|
| Medical Bill | $500 | $50 |
| Credit Card | $2,500 | $63 |
| Car Loan | $7,000 | $135 |
| Student Loan | $10,000 | $96 |
Start by focusing on the $500 medical bill while making minimum payments on all other debts. If you can put an extra $500 toward debt repayment each month, that medical bill could be gone in just one month. Once it’s paid off, roll that $550 (the $500 extra plus the $50 minimum payment) into paying off the $2,500 credit card balance next.
Benefits and Drawbacks
Benefits:
- Progress is easy to see, which can boost confidence and make the process feel more manageable.
- It can shorten the repayment timeline by several years and potentially save thousands in interest.
Drawbacks:
- Interest rates are ignored, which could result in paying more interest overall.
- High-interest debts may continue to grow while focusing on smaller balances.
- It might take longer to completely eliminate all debts compared to other methods.
How to Start the Snowball Method
- List all debts from smallest to largest balance, ignoring interest rates.
- Make minimum payments on all debts except the smallest.
- Put any extra money toward the smallest debt.
- Once a debt is paid off, roll its payment into the next smallest balance.
- Repeat until all debts are cleared.
Dave Ramsey, a well-known advocate of this method, shares:
"The debt snowball method is the fastest way to pay off your debt. It’s how I paid off $40,000 of consumer debt in just 18 months! And if it worked for me, it’ll work for you too."
Research backs this up. According to Northwestern University’s Kellogg Business School, Professor Blake McShane explains:
"We found empirical support that psychological factors can be helpful (in paying off debt). Paying off a small balance – a quick win – can make you feel good about yourself."
This method not only simplifies the debt repayment process but also highlights the psychological boost of achieving small victories, setting the stage for a comparison with the Avalanche method when it comes to saving on interest and staying motivated.
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Direct Comparison of Both Methods
Interest Savings Comparison
When looking at the numbers, the differences between these methods become clear. For example, one analysis showed the debt avalanche method accumulated $1,011.60 in interest over 11 months, while the snowball method racked up $1,514.97. That’s a $503.37 difference in favor of the avalanche approach.
However, results depend on your specific debt situation. Another case study found the avalanche method accrued $2,213 in interest over 26 months, compared to $2,251 in interest over 25 months for the snowball method. These figures highlight the importance of weighing financial savings against the psychological advantages of each method.
Success Rates and Motivation
Numbers aside, motivation plays a huge role in sticking to a debt repayment plan. The avalanche method may save more on interest, but the snowball method often leads to higher success rates because of its morale-boosting quick wins. Research supports this idea, showing that while the avalanche method reduces interest more effectively, the snowball method helps people stay motivated and consistent.
Ben Luthi, a personal finance expert, puts it this way:
"The best debt payoff option depends on your personal debt payoff goals. The debt snowball method can help you pay off your smallest balances faster, which can be motivating. But the debt avalanche method could save you more money overall."
Method Comparison Chart
Here’s a quick side-by-side look at how the two methods stack up:
| Factor | Debt Avalanche | Debt Snowball |
|---|---|---|
| Best Suited For | Math-focused individuals seeking savings | Those who need small wins to stay motivated |
| Implementation Difficulty | Requires tracking interest rates | Easier to organize by balance |
| Early Results | Takes longer to clear the first debt | Quick wins with smaller debts |
| Total Interest Paid (5-year analysis) | $8,394 | $9,378 |
| Average Payoff Time | 5 years 4 months | 5 years 5 months |
In a five-year analysis, the avalanche method not only saved more on interest but also helped clear debts one month earlier than the snowball method.
Pick the Best Method for You
Review Your Debt Numbers
Start by gathering all the details about your debts, including balances, interest rates, and minimum payments. Here’s an example of how to organize this information:
| Debt Type | Balance | Interest Rate | Monthly Minimum |
|---|---|---|---|
| Credit Card A | $5,500 | 24.99% | $165 |
| Personal Loan | $12,000 | 15.75% | $360 |
| Student Loan | $25,000 | 6.8% | $280 |
| Auto Loan | $8,500 | 4.9% | $225 |
Once you’ve outlined your debt profile, you can better evaluate which repayment approach aligns with your goals.
Consider Your Personal Style
The right strategy depends on how you prefer to tackle challenges. Here’s a quick breakdown to help you decide:
-
Go with the Avalanche Method if you:
- Want to save the most money on interest.
- Prefer focusing on long-term financial gains.
- Have debts with high-interest rates that you’d like to prioritize.
- Don’t need frequent motivation to stay on track.
-
Opt for the Snowball Method if you:
- Feel overwhelmed by large debts and need quick wins to stay motivated.
- Like seeing progress quickly by clearing smaller balances first.
- Value the emotional boost of paying off debts incrementally, even if it costs a bit more in interest.
Need Help Deciding?
If you’re still unsure which path to take, expert advice can make all the difference. Visit Steps To Be Debt Free for a free debt review, a tailored repayment plan, and tools to track your progress.
Next Steps
Main Points Review
Your approach to debt repayment should match your personal financial habits. The Avalanche method prioritizes saving on interest, while the Snowball method focuses on building momentum with quick wins.
"Personal finance involves both mathematics and behavior. The snowball method, while perhaps not as mathematically effective, can have significant behavioral value in that there is a strong sense of reward to paying a debt in full and reducing the number of outstanding debts."
With this in mind, it’s time to take action.
Start Your Debt Plan Today
Here’s how you can get started:
-
Set Up Your Tracking System
Choose a tool to keep your debt repayment organized. Some popular options include:- Undebt.it: $12/year for the premium version
- Debt Payoff Planner: Free with ads or $2/month for the pro version
- Unbury.me: Completely free
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Create Your Action Plan
Lauren Anastasio, CFP, offers this advice:"The last thing you want to do is spread your effort around by paying a little extra on all of your bills. If you have multiple credit card balances, loans, or other debts you want to pay off, choose one debt, commit to paying the minimum on all your others, and put every extra dollar you have to paying off that one debt in full. This is the quickest way to eliminate the number of bills you have to pay."
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Implement Your Strategy
Use the table below to guide your repayment approach based on the method you choose:Action Item Avalanche Method Snowball Method First Target Highest interest rate debt Smallest balance debt Payment Focus Priority debt Priority debt Minimum Payments Continue on others Continue on others Progress Tracking Monitor interest savings Count paid-off accounts
As Navy Federal Credit Union puts it, "The best debt repayment plan is the one you can stick with until you’re debt-free." If you need extra help, working with debt management professionals can speed up the process by up to 7x.
