Debt Snowball vs Debt Avalanche

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When it comes to paying off debt, the first question most people what answered is which method is better at paying off their debts. Is it debt snowball? Or is it debt avalanche? Which method will be better for you during your debt free journey? The answer may surprise you!

Debt Snowball

The term debt snowball is attributed to Dave Ramsey, and is used to describe when you are paying off your debts from the smallest debt to the largest debt, all the while “snowballing” your minimum monthly payments into a larger minimum monthly payment.

So, for an off the cuff, made up example:

For the debt snowball, you would pay Debt B first, since it has the lowest debt balance.

The debt snowball method means you pay the minimum payments towards all the other debts, the $25 minimum to Debt B, and any extra money you can to Debt B, until it is paid off.

Once Debt B is paid off, you take the $25 minimum you were paying on Debt B, and add it to the minimum payment on the next smallest debt. In this scenario, that is a $35 payment on Debt E. Debt E now has a $60 minimum monthly payment, along with any extra you can put towards debt throughout the month, until Debt E is paid off.

You keep following suit, paying off Debt D, Debt C, and finally Debt A, all the while combining your minimum payments until all the debts are paid off.

Debt Avalanche

Debt Avalanche is when you tackle your debt from the highest interest rate to the lowest interest rate. The reasoning behind this is that you’re paying less on interest in the long run. While this method won’t come with the easy wins associated with the debt snowball method, depending on your personal debt, it’s usually the fastest way to get out of debt.

So, using the same, totally made up example from above:

Under debt avalance method, you would start with Debt E since it has the highest interest rate. While debt snowball would give you a fast win to pay off Debt B before moving onto Debt E, the entire time you’re paying off Debt B, Debt E is earning interest. In some cases, depending on your debt scenario, the interest earned is more than your is earning more than your minimum payment each month.

Under this scenario, you would pay the $35 minimum payment on Debt E, and anything else you can throughout the month, until Debt E is paid off. Then you take the minimum payment on Debt E, add it to the Debt A minimum payment, making Debt A’s new payment $135 until you pay off Debt A.

In following suit of largest to smallest interest rate, after Debt A is paid off, you would then focus on Debt C, Debt D and finally Debt B.

Which Method Is The Right Method?

When it comes to the debt snowball vs debt avalanche and which is better, in my opinion this is where we start splitting hairs. Under each scenario, you still have a $325 minimum monthly payment by the time you get to the last debt.

Which method is the correct method for paying off your debt is determined by your end goal.

If you want to stay motivated along the way, tacking the smaller wins at a time, then the debt snowball method is for you.

If you want to get out of debt paying the least amount of interest, then the debt avalanche method is for you.

To help figure out which method of paying off debt is right for you, I highly recommend checking out this Debt Reduction Calculator by Vertex42. It comes in Excel format, but you can also download it to your Google Drive if you don’t have Excel. On the sheet, you can input your debt information, and then play around with which method you want to use to pay off the debt.

In the totally made up example I used above, the Vertex42 calculator says that both methods will take approximately 20 months to pay off all the debt, {paying only minimum payments and nothing else}, and that the avalanche method will save you $2 in interest. For us personally, we’ve taken a combination approach. Some of our debts have been done out of order for the snowball method, but are in order with the debt avalanche method.

I’m of the belief that there is no absolutely correct method to paying off debt, just as long as you change your financial habits and pay off debt as fast as you can given your unique set of circumstances. To me, it’s always the end game that matters… changing financial habits, saving for what’s to come, and getting debt paid off and out of our lives for good.