Two Debt Payment Philosophies - Avalanche and Snowball - Family on a winter road trip

Snowball and Avalanche: Two Debt Payment Philosophies, but Which One is Better?

Having debt isn’t necessarily a bad thing as long as you manage it the right way and have a plan to pay it.

Two popular strategies of debt repayment are the snowball and avalanche methods. Each has a unique structure and benefits, but they both are based on the concept of choosing one debt to pay down at a time. It’s been shown that consumers can boost their motivation to pay off debt by focusing on a single account before moving onto the next one.

Snowball method for paying off debt

The snowball method begins with a list of all the debts you owe, from the smallest balance to the largest. If two balances are the same, list the one with the higher interest rate first.

Next, list the minimum monthly payment required for each debt. For all of your obligations except the first on your list, you’ll continue making these minimum payments on time.

Use a budget to determine how much money you can afford to put toward debt payments each month. Subtract the minimum amounts due for your debts, then dedicate the remainder toward your smallest debt. Once that debt is paid off, move to the next debt in your list.

Here’s an example of the snowball method at work. Let’s say you have four debts like this:

  1. Credit card with a $1,500 balance, a 17 percent interest rate and a minimum payment of $15
  2. Credit card with a $2,000 balance, a 19 percent interest rate and a minimum payment of $20
  3. Auto loan with a $2,000 balance, a 5 percent interest rate and a minimum payment of $300
  4. Mortgage with a $50,000 balance, a 6 percent interest rate and a minimum payment of $500

With this list, you would first focus on the smaller credit card debt, then the higher credit card debt. This is because the auto loan has a lower interest rate than the credit card with the same balance.

Now, let’s say you can spare $1,100 to go toward debt payments every month. You would pay $500 toward the mortgage, $20 to the second credit card debt and $300 to the auto loan with a remainder of $280 to go toward the smaller credit card balance.

After about six months, your credit card will be paid off, and you can begin allocating more money to the second credit card debt ($280 + $20 = $300), then the car loan ($300 + $300 = $600). Once you have the auto loan paid off, you’ll be able to put your full $1,100 debt payment budget toward mortgage payments with (ideally) no additional debts to worry about.

This method works because it fuels your motivation to tackle each debt in an organized, responsible manner. Beginning with your smallest debt gives you a sense of accomplishment relatively quickly.

father and son playing in the snow

Avalanche method for paying off debt

While the snowball method has its merits and is generally useful for most people, there are a few drawbacks. No matter which debt you focus on first, you will be charged interest for the ones where you’re only making minimum payments—there’s just no way around that.

By targeting the smallest balance rather than the highest interest rate, you’ll incur more interest charges than if you tackled the debt with the highest interest rate first.

Here’s how the avalanche method would look for the same example as above:

  1. Credit card with a $2,000 balance, a 19 percent interest rate and a minimum payment of $20
  2. Credit card with a $1,500 balance, a 17 percent interest rate and a minimum payment of $15
  3. Mortgage with a $50,000 balance, a 6 percent interest rate and a minimum payment of $500
  4. Auto loan with a $2,000 balance, a 5 percent interest rate and a minimum payment of $300

Just like in the previous example, you’d take on the credit card balances first but for a different reason: These interest rates are significantly higher than the car and home loans. In this instance, it would take about two months longer to rid your list of the first debt than with the snowball method. Also, even though your auto loan is last on the list, you’ll likely pay it off with minimum payments before you pay off your mortgage, but you’ll still be focusing your debt repayment budget in a way that minimizes overall interest payments.

The benefit here is that you’ll get rid of the most expensive debts earlier. With that 19 percent credit card balance in the past, you won’t be racking up as many interest fees, whereas, in the first example, you’d be taking on those fees all the while you’re focusing on the smaller credit card balance. If your goal is to pay off your debt, then every penny counts.

couple warming up with blankets and coffee at home

Choosing the right method for you

Mathematically, the avalanche method makes the most sense. Paying off high-interest debt will save you more money in the long run. In practice, the average person tends to stick to the snowball method because of the sense of accomplishment it provides.

The debt payment method that’s right for you may depend on your personality. If you’re mathematically inclined or have strong self-discipline, the avalanche might make the most sense for you.

The debt snowball method is also useful and generally more manageable for most people. If you’re new to debt management or not sure if the avalanche method would work for you, start out with the snowball method. Feel free to re-evaluate once you pay off your first debt.

Taking control of your debt is just one part of getting your finances in order. Check out our 6-step method to improve other areas of your financial health.

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