Two popular methods people can use to pay off debt include the "debt avalanche" method and another called the "debt snowball," recommended by financial adviser Dave Ramsey.
With the debt avalanche, you pay off your debts in order by interest rate. It's also sometimes called the "high interest rate" method. With the debt snowball, you pay off debts starting with the lowest balance.
Each method has pros and cons, so before deciding how to tackle your own debt, it's important to understand what each strategy entails and why one method may be better for your own situation.
What's the Difference Between the Debt Snowball and Avalanche?
|Debt Snowball||Debt Avalanche|
|Pay off debt starting with the lowest balance||Pay off debt starting with the highest interest rate|
|Will pay more in interest||Will save money on interest|
|Provides frequent "wins"||May get frustrated paying on larger balances for a long time|
- With the debt snowball, you pay off debt starting with the lowest balance first.
- With the debt avalanche, you pay off debt starting with the highest interest rate.
- You will pay more in interest with the debt snowball method.
- The debt snowball allows you to completely pay off debts more quickly, which can help keep you motivated.
- With the debt avalanche, if you have a high interest debt with a high balance, you may get frustrated with the amount of time it takes to pay it off.
The Debt Avalanche Method
The debt avalanche method (also known as the debt stacking 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%, highest interest rate
- Visa, $7,500: 13%, second-highest interest rate
- Car loan, $4,000: 8%, third-highest interest rate
- Student loan, $1,900: 5%, lowest interest rate
The debt avalanche method advises that you make the minimum payment on all your loans. Then, you should throw all of your extra money toward paying off your Mastercard, which has the highest interest rate, at 19%.
Once you've wiped away your Mastercard debt, tackle the Visa balance, which has the second-highest interest rate, at 13%.
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.
The debt avalanche method saves you the most money in interest payments, but 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 toward paying down a loan without feeling the mental victory of crossing it off your list.
Debt Snowball Method
According to the snowball method, you should throw every spare penny toward paying off the loan with the lowest balance, regardless of the interest rate.
If you used the snowball method, you would re-order the above list as follows:
- Student loan, $1,900: 5%, lowest balance
- Mastercard, $2,500: 19%, second-lowest balance
- Car loan, $4,000: 8%, third-lowest balance
- Visa, $7,500: 13%, highest balance
You'd make the minimum payment on all your loans. Then, you'd throw every extra penny toward 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.
This method gives you a more immediate feeling of victory, but it might cost more. Making only minimum payments on your highest-interest debt means you'll pay more in interest, as compared to the debt avalanche method.
If you have an iPhone, iPad, or another iOS device, there are apps to help you eliminate your debt more quickly via the debt snowball method.
The Bottom Line
Personal finance is just that—personal. Paying off debt can be a little like dieting. Sure, there are 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 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 OK to experiment, too. If the debt avalanche method sounds more appealing to you right now, you can try it out for a few months. If you then 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 sometimes means changing your financial strategies. Don't beat yourself up if the first method you try doesn't work. Keep at it until you find something that does.
Consumer Financial Protection Bureau. "How to Reduce Your Debt."
Experian. "Debt Snowball Strategy: How Does It Work?"