Debt Snowball vs. Debt Stacking

Which Debt Payoff Method Is Better?

Which is better - the debt snowball, or debt stacking method?
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There are two popular methods that people use to pay off debt. The traditional method is called "debt stacking," while the other is called the "debt snowball," and is recommended by popular financial expert Dave Ramsey.

Let's take a look at the pro's and con's of each so you can figure out what approach to take to paying off your debt.

Debt Stacking

The "debt stacking" method (otherwise known as the debt avalanche method) recommends that you make a list of all your debts, ranked by interest rate, from highest to lowest.

For example, you might owe:

  • Mastercard - $2,500 - 19 percent - Highest Interest Rate
  • Visa - $7,500 - 13 percent - Second-Highest Interest Rate
  • Car Loan - $4,000 - 8 percent - Third-Highest Interest Rate
  • Student Loan - $1,900 - 5 percent - Lowest Interest Rate

The "debt stacking" method advises that you make the minimum payment on all your loans. Then, you should throw all your extra money towards paying off your MasterCard, which has the highest interest rate, at 19 percent.

Once you've wiped away your 19 percent MasterCard debt, tackle the Visa balance, which has the second-highest interest rate, at 13 percent.

It'll take you a long time to repay the Visa, since it has the highest balance, at $7,500. Stick with it. Whenever you're done, you can start paying off the debts with lower interest rates.

Pros: This method saves you the most money in interest payments.

Cons: It might take a long time to get a high-balance debt crossed off your list.

You may feel frustrated after investing so much time and energy towards paying down a loan, without feeling the mental "victory" of crossing it off your list.

Debt Snowball

According to the snowball method, you should throw every spare penny towards paying off the loan with the lowest balance, regardless of interest rate.

If you used the snowball method, you would re-order the above list as follows:

  • Student Loan - $1,900 - 5 percent - Lowest Balance
  • Mastercard - $2,500 - 19 percent - Second-Lowest Balance
  • Car Loan - $4,000 - 8 percent - Third-Lowest Balance
  • Visa - $7,500 - 13 percent - Highest Balance

You'd make the minimum payment on all your loans. Then, you'd throw every extra penny towards the debt with the smallest balance, regardless of the fact that - in this particular case - it ALSO has the lowest interest rate.

The idea behind this method is that paying off the loan with the smallest balance will give you the psychological feeling of "victory" when you cross that loan off your list. That mental "win" will motivate you to continue saving money and repaying your debts.

Pros: This method gives you a more immediate feeling of victory.

Cons: It costs more. You'll pay more in interest, as compared to the debt stacking method.

Which Method Should You Use?

I like to say that personal finance is ... well ... personal.

Paying off debt is a little like dieting. Sure, there are more "ideal" eating plans out there, but let's be realistic: most people aren't going to stick to a perfect diet. The "best" diet is the one that you'll stick to.

Paying off debt is similar. Be honest about making a budget that fits your personality and keeps you motivated. You'll pay the most in interest if you don't stick with your debt payoff plan.

It's okay to experiment, too. If the debt stacking method sounds more appealing to you right now, and you try it out for a few months and find that it's not working, there's no reason you can't switch to the debt snowball method. 

Having a plan is a good idea, but that doesn't mean you need to hold yourself to it 100% of the time, 365 days of the year. Things change, life throws curve balls at you, and you need to adapt. That somtimes means changing your financial strategies. So don't beat yourself up if the first method you try doesn't work. Keep at it until you find something that does.