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There seems to be a hot debate about these two different methods and strategies to pay off debt. Today we are going to be walking through both the Debt Snowball Method and the Avalanche Debt Repayment Method.
I think one is clearly superior and we’ll be walking through why that is, but I’ll be as unbiased as I can.
Keep reading if you want to learn how to pay off debt in the most efficient way and how to pay debt off faster. Additionally, if you want to purchase a debt repayment tracker, for either the debt snowball method or avalanche method, check out my printables and special bundles here.
If you don’t want to pay, consider joining my email list! You get FREE access to my complete resource library which has a bunch of budget templates for google sheets. I also have some fun printable debt repayment trackers in there as well!
Let’s jump into it!
Table of Contents
The Debt Snowball Effect
The debt snowball effect means you pay the minimum balance for all your debts, except the smallest one. You focus all your extra money on paying off the smallest debt you have. Then when that small one is out of the way, you take the money you were using and apply it to the second smallest one.
You keep going until each debt item is paid off.
If you want to implement the debt snowball effect, write down all of your debt! Make sure you are not leaving anything out. Then organize those debts from smallest balance to largest balance. That is how you determine your debt snowball order.
Pros and Cons to the Debt Snowball Effect
Pro: It’s easier to start paying off debt when you’re focused on the smallest one. Paying off one will create momentum and more importantly, motivation. Once you’re able to pay off one debt item you will be more motivated to keep going!
Con: Because you are neglecting the interest rate, you might be paying more money than you have to in the end.
Avalanche Debt Repayment
The Avalanche Debt Repayment method is very similar to the Debt Snowball Effect. You are only paying the minimum balance for all your debts except the one with the largest interest rate. You want to focus on the debt with the largest interest rate and throw any additional money you have at that one.
In contrast to the debt snowball effect, after writing down all your debt items, order them from largest interest rate to smallest interest rate. That is how you determine the order under the avalanche debt repayment method.
Pros and Cons to Avalanche Debt Repayment
Pro: From a numbers perspective, you are minimizing the amount of interest you pay. This means you are paying less overall. Additionally, because you are paying less interest, you could be paying off debt faster overall.
Cons: It takes significantly more time to feel like you’ve had a win. This method takes more discipline and can be harder to implement. You won’t see results as fast.
Best Debt Payoff Strategy – Let’s do Math
What could possibly be more fun than comparing both methods using a math problem??
Let’s say you have 2,500 dollars every month to apply to your debt.
$15,000 of student loan debt with a 6% interest rate, minimum payment of $300
$10,000 of credit card debt with a 18% interest rate, minimum payment of $200
$5,000 car loan with a 4% interest rate, minimum payment of $100
Debt Snowball Plan
If you follow the debt snowball effect, your plan for debt payoff would be in this order:
Car Loan: $5,000
Credit Card Debt: $10,000
Student Loans: $15,000
Remember, debt snowball = smallest amount first. You would be able to pay off the entirety of the debt in a year and 1 month and you would incur about 1,552 dollars of interest.
Car Loan: $5,000 * 4% annually for 3 months = about $30
Credit Card Debt: $10,000 * 18% annually for 8 months = about $799
Student Loans: $15,000 * 6% annually for 12 months = about $723
Avalanche Debt Repayment
Now let’s do the exact same thing with the avalanche method paying off debt plan, your order would be:
Credit Card Debt: 18% interest
Student Loans: 6% interest
Car Loan: 4% interest
This time listing them in order by interest rate rather than balance. You would once again be able to pay off the entire debt balance in a year and 1 month, however you would only be paying about $1,236 in interest.
Credit Card Debt: $10,000 * 18% annually for 5 months = about $453
Student Loans: $15,000 * 6% annually for 11 months = about $602
Car Loan: $5,000 * 4% annually for 12 months = about $180
If you’re more of a visual learner and this math is a bit confusing, you can follow along on paper if you grab my free printable avalanche debt repayment tracker or snowball debt repayment tracker! You can get it for free from my resource library here or you can purchase it here!
If you choose to purchase, you can get an individual account tracker, snowball tracker, avalanche tracker, debt at a glance tracker or either snowball bundle or avalanche bundle! So many choices I know!!
Paying Off Debt Snowball vs. Avalanche – What’s the Difference?
For both methods you were able to pay off your debt in the same amount of time!
The debt snowball effect lets you pay off the first two debt items even faster than the debt avalanche method. You were able to pay the first debt in 3 months and the second in 8 months, compared to 5 months and 11 months for the avalanche.
If you want to pay debt off fast, you can achieve this with the debt snowball and celebrate small wins faster along the way. However if you want to PAY LESS overall, you should go with the debt avalanche.
If you ask me, the avalanche method should be your go to.
Although in this example you were able to pay off your debt in the same amount of time, depending on the amount of loans you have, that might not always be the case. More often than not, it will take a longer time to pay off debt with the snowball method.
Why? You may ask.
Well, if the debts with higher interest rates are still accruing more and more interest, you have to pay for that. More interest means more time paying off debt. Although you may be paying off debt faster in the short term, having to pay more interest is going to extend the amount of time it takes to become debt free in the long term.
Paying less interest = paying off debt faster = avalanche debt repayment method.
Final Thoughts
Although it seems like a lot of math, it can be broken down into a few simple sentences.
Prioritizing by interest rate is going to mean you pay less overall. Prioritizing by account balance means you get to the finish line faster for your small debts and your debt payoff journey starts sooner in the short run.
If the psychology of debt payoff is more important to you, then the debt snowball effect is better for you. However, I would encourage most people to pursue the avalanche repayment method instead.
What’s your paying off debt plan?
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