The debt avalanche and the debt snowball methods are two strategies for paying down debt. With the debt avalanche method, you pay off the high-interest debt first. With the debt snowball method, you pay off the smallest debt first.
Each method requires you to list your debts and make minimum payments on all but one. Then, once the debt is paid off, you target another balance, and so forth, until you have paid down all your debts. Depending on your preferences and circ*mstances, you may prefer one method better once you understand the differences.
Key Takeaways
- Debt avalanche and debt snowball are both types of accelerated debt repayment plans.
- The debt avalanche method involves making minimum payments on all debt and using any extra funds to pay off the debt with the highest interest rate.
- The debt snowball method involves making minimum payments on all debt, then paying off the smallest debts before moving on to bigger ones.
- The debt avalanche method can result in paying less interest over time.
Debt Avalanche
The debt avalanche method involves making minimum payments on all your outstanding accounts and using any extra money to pay off the bill with the highest interest rate. Using the debt avalanche method will save you the most in interest payments.
Debt Avalanche Example
For example, say you have $3,000 extra to devote to debt repayment each month, and you have the following debts:
- $10,000 credit card debt at an 18.99% annual percentage rate (APR)
- $9,000 car loan at 3.00% interest rate
- $15,000 student loan at 4.50% interest rate
In this scenario, the avalanche method would have you pay off your credit card debt first because it has the highest interest rate. If you put your extra money toward that debt, you could pay off your remaining debt in 11 months, paying a total of $1,011.60 in interest.
In comparison, the snowball method would have you tackle the car loan first. You would still be debt-free in 11 months but would have paid $1,514.97 in interest.
If you have significant amounts of debt, the avalanche method of targeting the highest interest rate debt can also reduce the time it takes to pay off the debtby a few months.
Debt Avalanche Pros and Cons
The debt avalanche method can save money and time, but it does have its downsides. It requires discipline to regularly put your extra cash into paying off a particular debt, not just the minimum. The debt avalanche strategy will not work as effectively if you lose motivation and drop it partway through.
The debt avalanche approach also assumes a specific, constant amount of discretionary income you can apply to your debts. If your daily living expenses increase or emergency expenses arise, you may have to stop using the debt avalanche approach.
Pros
Reduces the amount of total interest you pay
Reduces the amount of time it takes to get out of debt
Good for budget-oriented people
Cons
Requires discipline and commitment
Needs discretionary income
Debt Snowball
The debt snowball method involves paying off the smallest debts first and then moving to bigger ones. It is a strategy in which you essentially tackle the easiest jobs first.
First, list all the outstanding amounts you owe in ascending order of size. Target the smallest one as the first one to pay off, then put your extra money toward that payment while making the minimum payments on the rest of your bills. Once the first debt is paid off, aim the money previously devoted to that payment at the next largest debt. This method can encourage those who feel overwhelmed by numerous payments, since smaller debts will be paid off fairly quickly.
Another way you can pare back debt is to use a debt relief company. These companies can help you reduce the amount you owe by negotiating with creditors, but they may also damage your credit. If you use this strategy, make sure you use a reputable debt relief company.
Debt Snowball Example
Let's see how the snowball effect works when you have $3,000 extra to devote to debt repayment each month, and you have:
- $10,000 credit card debt at an 18.99% APR
- $9,000 car loan at 3.00% interest rate
- $15,000 student loan at 4.50% interest rate
The snowball method would have you focus on the car loan first because you owe the smallest amount of money on it. You'd settle it in about three months, then tackle the other two. As with the debt avalanche method, you'd become debt-free in about 11 months. However, you would have paid $1,514.97 in interest—about $500 more overall.
The advantage of the snowball method is that the feeling you get from paying a debt may help you stay more motivated to pay off another.
Debt Snowball Pros and Cons
The primary advantage of the debt snowball method is that it helps build motivation because you see faster results. With this strategy, you don't need to compare interest rates or APRs, only the amounts owed.
The largest drawback of the debt snowball is that it does not reduce the amount you pay in overall interest as much as the debt avalanche method.
Pros
Can build motivation by settling debts faster
Cons
Does not reduce interest as much as the debt avalanche method
Can take longer to become completely debt-free
Which Is Better, Debt Snowball or Debt Avalanche?
Whether the debt snowball or the debt avalanche method is better depends on your financial circ*mstances and personality. In terms of saving money, a debt avalanche is better because it saves you money in interest by targeting your highest-interest debt first. However, some people find the debt snowball method better because it can be more motivating to see a smaller debt paid off more quickly.
Should I Pay Off Big Debt or Small Debt First?
Ideally, you want to pay off the debt with the highest interest rate first to save the most money. But if you find that paying off small debts motivates you to continue working toward reducing debt, you may want to pay those off first instead.
Is It Better to Put Money in Savings or Pay Off Debt?
Paying off debt has advantages—especially if you're incurring a high interest rate that can compound quickly and put you further into debt. Getting rid of debt will improve your credit score, helping improve your chances of getting approved for mortgages, personal loans, and credit cards. Paying off debt can free up funds for other goals like saving or investing.
The Bottom Line
The debt avalanche and debt snowball methods are two different strategies for paying down debt. The debt payment strategy that's right for you depends on your personal circ*mstances and preferences. Weighing the pros and cons of each can help you create a plan to get you out of debt and into a better credit score. Then, you'll be able to focus on other financial goals.
