Debt Repayment: The Avalanche Vs Snowball Method

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So you have had enough with debt and your are ready to tackle it head on with raging force.

You want it gone, — and understandably so!

When it comes to paying off debt one of the most important things to do before throwing random money at each debt is to first come up with a strategy.

Create a debt exit strategy

Why is it important?

Strategy is important because one method may help you get things paid off faster, while another method could help you save more money from interest rates in the long run.

There are two popular methods; the debt snowball method and the debt avalanche method, when it comes to paying down debt that many people swear by.

Both are highly successful if used correctly, you just have to pick your preference and stick with it.

When it was time for me to start my own debt free journey these are the two that I kept seeing circulate online. It wasn’t long until I started running across Dave Ramsey articles and videos and became hooked to the idea of financial independence through becoming debt free and living within my means.

Paying off debt is a big step to true freedom, so congratulations to you on that first step. No matter the challenges always remember it can be done, it just takes time and consistency.

In this article I will discuss the two popular debt repayment methods and the benefits for each, so that you can arrive to your own conclusion of which method would work best for you.

Related Post: Steps to help you pay off debt fast

Debt Snowball Method

Focuses on balances from smallest to great.

With the debt snowball method you are going to take all of your debts from smallest to greatest with your main focus being to pay off the smallest balance first.

You will pay the minimum balance for all of your loans, except for the smallest loan. With that loan ANY extra money left over after paying the minimum of all of your other debts will go to the smallest loan.

Your snowball method broken down would look something similar as:

So as you can see in the above example more money is being paid towards the creditor (Visa) that has the smallest balance.

The snowball method is really visually appealing because the smallest debt will be paid off in no time, motivating you to scratch it off the list then move on to the next.

Whatever additional dollar, whatever additional cent, that you have should go directly to your debt with the smallest balance. And once that smaller balance (Visa) is paid in full, the money that was going to the smaller balance can now go to the newer smaller balance (MasterCard) creating a snowball effect, hence the name.

Pros: This method helps you to actually see a fast change, and it’s easy to set up your smallest to greatest accounts. You can also quickly build momentum and motivation to keep paying off your debts.

Cons: This method does not take into consideration the interest rates on each of the loans. So although you maybe seeing faster wins, you could be paying more in the long run depending on the interest rate per loan.

Debt Avalanche Method

Focuses on interest rates from greatest to smallest.

With this method you are going to take your loans that have the highest interest rate from greatest to smallest and will pay them off like so.

So in this scenario you will not be focusing on the balance at all. Similar to the snowball method, proponents of this method use the same strategy of paying additional money to a focus debt, but the focus debt in this case is the one with the higher interest rate.

You will have to do some research if you don’t know your interest rates at the top of your head, — which I don’t think most people want to remember their interest rates. You can find this on a recent statement or give your creditor a call to ask for it.

The example above gives a breakdown of the loans that will be paid with focus on the interest rates.

Pros: You will potentially be saving more money since you are tackling loans with higher interest rates.

Cons: This method could take longer depending on the balances of your loans. Plus it may time some hassle to find out the interest rates of each of your loans.

Conclusion

Both methods work, and it comes down to preference which one you decide to use. For me personally I’m a big proponent of the debt snowball method, and it is what I used to pay off my credit card debt with. I love the fact that I was able to see the fruits of my labor fairly quickly by paying off the smaller debts first. Although the avalanche method may save you some money, it’s best to have the motivation and keep it, because paying off debt isn’t easy.