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If you want to be debt free, you need a strategy. A method.
The average US household has $54,000 in credit card debt.
You need a plan. You really do.
The good news is that you have more than one option.
There are several ways to get out of debt, but the two most used ways are called the debt snowball and the debt avalanche.
Let’s look at the differences and see what works best for you…
Two Methods
I’m going to go over two methods for paying off debt.
There is no right or wrong here. It depends on you and your situation.
I used the debt snowball to get out of debt and it worked for me. That’s what’s important…it worked!
If you become debt free, you win. It doesn’t matter which method you used once you are debt free.
The debt snowball and the debt avalanche are very similar. Here’s how they work:
You pay the minimum on all your payments, except one. Once that is paid off, you add that payment to the next debt. Either way, it turns into a snowball or an avalanche and your debt will melt away.
The difference is in the order that you will pay off your debt.
Let’s look at these methods in detail…
The Debt Snowball
The debt snowball (made popular by Dave Ramsey) is a method for paying off all your debt by starting with the lowest outstanding balance.
You put as much money as you can towards your lowest balance, while making the minimum payment to every other account.
Once your lowest outstanding balance is paid off, you put as much money as you can towards your second lowest outstanding balance. You repeat this method until you are debt free.
Related Book: The Total Money Makeover.
Example: Jim has four different debts to pay off. Two credit cards, a student loan and a personal loan.
Here is the order that Jim would pay off his debt:
- $12,000 credit card (11% interest)
- $15,000 credit card(18% interest)
- $19,000 personal loan (6% interest)
- $22,000 student loan (8% interest)
Debt Snowball Benefits
The idea behind the debt snowball is to create a series of “small wins” and “early success”. This is especially true if you have several different debts to pay with low balances.
It’s generally pretty easy to pay off a few small balances, then you have all of that extra money to start adding to your other debts.
Also, if you have tried to pay off your debt before and failed, you may want to consider the snowball, because statistically, people are more likely to stick to it.
Debt Snowball Drawbacks
When you pay your smallest balance first, you don’t pay attention to the interest rates, therefore, you will end up paying more interest and it will take you longer to get out of debt.
If you’re all about the numbers and you don’t need the emotional support of having small wins, the debt avalanche may be better for you.
The Debt Avalanche
The debt avalanche is very similar to the debt snowball, except you pay off your debt in order of interest rate.
You put as much money as you can towards your highest interest rate debt, while making the minimum payment on every other account.
Once your highest interest rate debt is paid off, you put as much money as you can towards your second highest interest rate. Then you would repeat this method until you are debt free.
Related Book: The Money Book for the Young, Fabulous & Broke
Example: Remember Jim? Let’s use the same debts and order them for the debt avalanche. Two credit cards, a student loan and a personal loan.
Here is the order that Jim would pay off his debt:
- $15,000 credit card(18% interest)
- $12,000 credit card (11% interest)
- $22,000 student loan (8% interest)
- $19,000 personal loan (6% interest)
Debt Avalanche Benefits
With the debt avalanche, you will pay less money in interest. If you are only concerned with paying as little as possible to the banks and loan companies, go with the debt avalanche.
You will also be out of debt quicker with this method, since you are attacking those high interest rates first.
Debt Avalanche Drawbacks
You may not get the small motivational wins in the beginning.
If your highest interest debt is one of your largest, it may be a while before you really start to see progress.
If you think the debt avalanche makes the most sense, but you still need motivation, try Ready for Zero. It’s an app that tracks your progress and motivates you along the way to keep paying off your debt, starting with the highest interest first.
What’s Best for You?
It really comes down to your situation. It all comes down to you!
The debt snowball works great for someone with a large amount of small outstanding balances, because you will be quickly freeing up money to put towards other debt.
The debt avalanche works great for someone with a large amount of very high interest credit card debt that needs to be paid off quickly.
It also depends on your personality. If you know you need a lot of motivation, consider the snowball. If you are all about the numbers, consider the avalanche.
Don’t forget that money can be a very emotional thing. Too often, people argue their side with pure math. That’s not how money works. At least, not with personal finances.
Sometimes the right method may not make the most sense on paper, but if it works, you still win!
Photo Credit: Dinkel, Shena, Subharnab | Stats
*Part of Financially Savvy Saturdays on Femme Frugality and A Disease Called Debt*
I’ve never had enough debt to worry about avalanche vs. snowball. I tend to lean more towards avalanche because of the math, but agree that if getting those emotional wins is going to keep you motivated and get you to actually do it, snowball away!
That’s great that you haven’t had to worry about it! I am right there with you. If I had to do it again, I would probably choose the avalanche method.
Thanks for the comment!
I saw this paper comparing the two (scroll down): http://fivethirtyeight.com/datalab/in-the-papers-stimulus-spending-investing-and-paying-off-debt/
It depends on the interest rate which is better.
Interesting read. Thanks for sharing. I agree that sometimes it just doesn’t make sense to snowball debt if some interest rates are outrageous.
Thanks for the comment!
It’s too bad that money is so emotional, because the math is so clear! However, it’s usually emotional reasons that cause people to be in debt in the first place, so they definitely factor into payoff decisions, too.
The ideal situation is for someone who needs the emotional kick to start with the snowball method, then realize they can “do this debt payoff thing” and switch to being motivated by the shortened timeline of paying them off by highest cost.
Hey Anne!
Well said! Money is such an emotional thing. That’s. good point that emotions got them in debt in the first place. That’s almost always true!
Thanks for the comment!
Once again Kalen, you’re spot on! The debate over snowball v. avalanche v. whatever is a waste of time. Just choose one that feels right to you and DO IT! As you say, no one technique will work best for every debtor. The important thing is get started and stick to it.
Thanks Kurt!
You’re exactly right! That’s the important part: just do it! That’s how you get out if debt.
Thanks for the comment!
Debt avalanche makes the most mathematical sense but like you said, it depends on your personality. If you’re not going to stick to the debt payment plan because you don’t feel like you’re making much of a dent, the snowball method gives more motivation since you see some accounts completely paid off. I’ve paid off my higher interest student loans…I have some that are at very low interest rates which I’m not in much of a rush to pay off. I’ll invest it instead.
Hey Andrew!
I agree. It’s crazy that the snowball works so well even though it’s all mental. I also understand investing while paying down your student loans. If you can get a high return and you’re interest rates are low on your loans, I would say go ahead and invest some money!
Thanks for the comment!
Ive done both at different seasons and reasons….and for different bundles of debts?
That works too! I like that there are a few ways to pay down debt, depending on the person and the debt.
Thanks for the comment!
I’m a Dave Ramsey fallowed so fallow the debt snowball method. With that being said, sometimes it makes more financial sense to pay off a loan or other debt out of sequence.
Hey Tennille!
I’m also a Ramsey fan! I agree, the method depends on the situation.
Thanks for the comment!
I never tried any of these methods consciously, but I think if I were in the position I would try to calculate how much money I will spend in total using each method, and will use the one that will cost me less money 😀 Thanks for sharing!
Same here! I’m too big on the math to do a method that requires you to spend more money.
Thanks for the comment!
We paid off the small balances first when we were in debt years ago. I was all about the small wins =) We’ve been completely debt-free for several years now and you’re right, it doesn’t matter which strategy you chose. It just matters that it works.
Hey Holly!
That’s awesome! I’m glad that worked for you. That’s what my wife and I did too. Whatever works!
Thanks for the comment!
Great and thorough post, Kalen! We were doing the snowball at first but once we got our emotions in check we switched to the avalanche. Both are very good methods!
Hey Laurie!
I think that is generally the best method. Use the small wins at first, then move to a method that will get you out of debt quicker. Well said.
Thanks for the comment!
This is good practical advice. My sister is in debt like me and most people, but being a single parent is even more challenging. This has helped her to look at things more practically and gave her a refreshed look at how she is going to shovel her way out.
Hey Alicia!
The important thing is that she is trying to get out of debt. As are you! That’s what matters.
Thanks for the comment!
I’m generally more motivated by the cold, hard numbers, so I’d have to go for the avalanche.
Hey Stefanie!
Same here. If I had to do it over, I would go with the avalanche.
Thanks for the comment!
Take this with a grain of salt, as somebody who really hasn’t had much in the way of debt, but I would say that the avalanche is a little more effective. But like you said, it depends on the person and what works for them, because not everybody is the same.
Hey Daisy!
I think it is much more effective in terms of numbers. The only reason the snowball would be more effective is for emotional reasons.
Right now I have 0% interest on my CC debt so I’m taking advantage of that and trying to pay it quickly for my before it goes up next year. If I had a lot of different debts as you showed in your post I would go with the avalanche method. Savings in interest are hard to ignore.
That’s great that you have 0%. Get it paid off ASAP and you will be good to
Go!
Thanks for the comment!
I have currently been following debt snowball method because reducing the number of debts seems more satisfactory. Once I pay my all small debts, then I will follow the avalanche method which is best for long term debt.
That’s a great method! The snowball really can be motivating and then switching to the avalanche can help you pay off your debt faster!
Thanks for the comment!
Ah the classic conundrum. While it is easy to say pick the one which works for you, that is exactly the case as you’ve posted here. I personally use the avalanche method because numbers don’t lie. With my large student loan debt, paying interest for longer than I need to will result in thousands of dollars more if I use the snowball method. I use Ready for Zero myself and it’s great to see the day I will be debt free!
That’s awesome that you use it. It’s a great tool and a great way to get the benefits of both sides.
Thanks for the comment!