Debt repayment: The snowball vs. the avalanche method

A plan can help you eliminate debt more easily than you realize. The snowball and avalanche methods are popular methods for paying off debts. The snowball method tackles the smallest debt first, while the avalanche method prioritizes the debt with the highest interest rates. Both have the same goal: to help you get out of debt and save money.

What is the debt snowball method?

The debt snowball method prioritizes paying off your smallest debts first. You would pay as much as you can afford toward the smallest debt you owe and the minimum payment for the rest. Once you pay off the smallest debt, you add what you were paying toward it to your payment for the next-smallest debt. As you pay off each debt, the amount you pay toward the next-smallest debt grows like a snowball rolling downhill.

How to implement the snowball method

Here are 5 steps to follow for the snowball method:

1. List your debts from the smallest to the largest amount, disregarding interest rates.
2. Make the minimum payment on all debts except the smallest one.
3. Put as much money as you can toward the smallest debt amount each month until it is paid off.
4. Put the money you were paying on your smallest debt and add that to your next-smallest debt until that debt disappears.
5. Continue the process until you are debt-free.

Snowball method example

Say you have a $1,000 medical debt with an interest rate of 5%, a $5,000 credit card debt with an interest rate of 6%, and a $2,000 student loan balance with an interest rate of 8%.

The debt snowball method would tackle these debts as follows:

1. List your debts from smallest to largest: $1,000, $2,000, and $5,000.
2. Make minimum payments on the $2,000 and $5,000 debts.
3. Pay as much as you can each month toward the $1,000 debt until it is paid off.
4. Add the money you were paying on your $1,000 debt to your payment on the $2,000 debt until the $2,000 debt disappears.
5. Apply the total you paid toward the $2,000 debt to the minimum on the $5,000 debt until it’s paid off.

How much extra should you pay? There is no rule. Pay as much as your budget allows. The more you pay, the faster you’ll repay your debts.

Pros and cons of the snowball method

Will the debt snowball method work for you? Consider the pros and cons before choosing a method.

Pros

• Gain confidence quickly: The debt snowball method works because paying off a small loan can give you the motivation to keep going and tackle the larger debts.
• Easy to understand: The debt snowball method is easy to understand and implement because you only need to identify the smallest debt and pay it off first.

Cons

• May not save the most interest: Because you’re not necessarily paying the debt with the highest interest rate first, you may pay more in total interest.
• May take longer: Due to the interest you’ll pay on your larger debts, it may take longer to pay off all your loans.

What is the debt avalanche method?

The debt avalanche method prioritizes paying off debt with the highest interest rate first. As with the snowball method, you’d pay as much as you can toward the debt with the highest interest and the minimum on your other accounts. Once you’ve repaid the highest-interest debt, you add what you were paying on it into the payment on the debt with the next-highest interest rate. Paying off your most expensive debts first allows you to pay off the cheaper ones more easily and possibly more quickly.

How to implement the avalanche method

Here are 5 steps to implement the avalanche method:

1. List your debts from the highest to the lowest interest rate, no matter the balance.
2. Make minimum payments on all debts with lower interest rates.
3. Focus on paying off the debt with the highest interest rate first until it’s gone.
4. Add what you were paying toward the highest-rate debt to your payment for the debt with the next-highest rate.
5. Repeat this process until you have paid off all your debts, ending with the debt that has the lowest interest rate.

Avalanche method example

How might you eradicate the debts we listed earlier using the avalanche method?

1. List your debts from the highest interest rate to the lowest interest rate: $2,000, $5,000, $1,000.
2. Make minimum payments on the $5,000 and $1,000 debts.
3. Put as much money as possible toward the $2,000 debt until it is paid off.
4. Add the money you were paying on your $2,000 debt to the $5,000 debt until the $5,000 debt disappears.
5. Continue the process until you pay off the $1,000 debt.

Pros and cons of the avalanche method

What are the benefits and drawbacks of the debt avalanche method?

Pros

• Saves you money on interest: The debt avalanche method can save you money on interest because you’re paying off the debt with the highest interest rate first.
• May shorten debt: Tackling high-interest debts first can help you pay off your debts more quickly.

Cons

• Might require more discipline: You may not see results as quickly because it may take longer to pay off the debt with the highest rate. It offers fewer immediate psychological rewards, which can be frustrating for some people.

Other debt repayment strategies

Are the debt snowball and the debt avalanche methods your only options? Definitely not! Let’s look at a few alternative ways to pay off debts.

Debt consolidation loans           

Debt consolidation involves taking out a new loan, such as a personal loan, a home equity line of credit, or a home equity loan. You use the loan to pay off multiple debts and then have a single loan to manage. You also can do this with a balance transfer credit card or cash-out refinance.

You can save money if you can get a lower interest rate on your consolidation loan. Home equity loans and HELOCs usually have lower interest rates than personal loans or credit cards because they use your home as collateral.

Loans borrowers often consolidate to save money include:

• Student loans
• Credit cards
• Auto loans
• Personal loans
• Payday loans

You may need to meet specific credit score requirements to qualify for a consolidation loan.

Combining strategies with hybrid methods

Some people might find that a hybrid approach works best. For example, you might start with the debt snowball method to gain a quick win, then switch to the debt avalanche method to save on interest. This way, you get the motivation of a quick win and the benefits of saving on long-term interest.

The importance of creating a budget

Creating a budget gives you a plan for your money. Creating a budget when paying off debt helps you understand how much you can afford to pay toward your debts, while also helping you stay on track and avoid taking on new debts. Without a budget, it might be challenging to understand your expenses and debt payoff during a particular month.

Additional tips for debt management

Learning about debt management can help you learn about all the possibilities to help you with debt management.

Track expenses and income

Make a list of expenses, such as rent, utilities, phone bill, etc. Write down how much money you make each month and subtract your expenses from your income. Create a plan for how you’ll spend your money each month and consider allocating any extra money toward paying off debt. Many budgeting apps can help you track your money.

Set realistic goals

How fast do you think you can comfortably pay off debt? Determine a reasonable additional amount you can afford to pay toward your debts. Using a budget can help you determine the right amount for your situation. The last thing you want is to feel financially constrained because you’re trying to get out of debt, so keep in mind that you can pay off debt and still live a comfortable lifestyle.

Seek professional financial counseling

You always can consider online tools and online, including free apps, to help you get out of debt. If you think you need more help, banks or credit unions may offer guidance on how to get out of debt. Your brokerage account, 401(k) provider, or your employer’s human resources department also may have resources to help you.

You also can consult reputable debt counseling services. Verify that the service you choose is accredited by the National Foundation for Credit Counseling and is in good standing with the Better Bureau.

The bottom line: Choose a debt repayment method that helps you hit your financial goals

Whatever debt repayment method you ultimately choose, it should help you achieve your financial goals. Consider tracking expenses, understanding your cash flow, setting realistic financial goals, and seeking additional guidance and support from experts to get a holistic view of your finances.