It is fantastic that you are taking the first steps to get your debt paid off. You’ve probably done your research and have come across the terms debt avalanche and debt snowball. Both of these strategies have their pros and cons on why they are the better method. No matter which method you choose, debt avalanche vs debt snowball, just know you are taking the right steps in getting your debt paid off.
The Avalanche Strategy
The Debt Avalanche works by paying off the highest interest rate debt first, regardless of balance. This is mathematically the best choice that you can make. You end up saving the most money in the long run but may end up feeling like you are treading water before your payments start to grow. This strategy works best for those who are mentally strong and rely on the numbers to make their decisions.
If you are the type of person who needs to have mental wins throughout your journey than this isn’t the strategy for you. This strategy also does not work well if all your debt is at very similar interest rates. This prevents ‘a clear next step’ from becoming evident.
How the Debt Avalanche Works
The debt avalanche works by paying the highest interest rate off first. So if you have 5 credit cards, a mortgage, a car payment and a personal loan you are probably going to be paying off one of the credit cards first. You completely ignore the balances that are on each of the accounts and only focus on the interest rates. For example the difference of 1% is an extra $10 a year for every $1,000 owed. That means that the difference between 11% and 21% on a credit card with a $3,000 balance is an extra $300 a year.
The goal of this strategy is to make sure you make payments on all of your debt first. Cover whatever the minimum payments are across all your debts. The next step is to take any extra money you have leftover and apply it towards the highest interest debt. Once this debt is paid off you move on to the next debt.
The Snowball Strategy
The debt snowball works a little differently. For the debt snowball you pay off the lowest balance debts first. The benefits of the debt snowball strategy is two fold. The first benefit of the strategy are the mental victories. If you have debt spread across multiple accounts, the smallest accounts become eliminated first. This can be extremely rewarding for those that enjoy those serotonin boosts. The second benefit is the elimination of minimum payments. When the debt is paid off in full you no longer are responsible for making the minimum payments. This is how the snowball builds to get bigger and bigger. Eventually the will have less debts you are making payments towards.
The debt snowball is not the ideal strategy for those who want the strategy that makes the most financial sense. For those who want to pay the least, the debt avalanche is the way to go. This method also isn’t ideal for those who have large balances across all their active accounts. The time to get the mental wins in this scenario might be counterproductive.
How the Debt Snowball Works
Given the same situation as mentioned above, the debt snowball would be paying off the lowest balance first. This could be any one of the debts, it just depends on the balances. The benefit can be different based off of the debt that is being paid off first. For credit cards, minimum payments are often so low that it does not make a huge difference when one is paid off. Credit card minimum payments are based on the balance amount. As the balance is reduced the minimum payment is reduced until it is $25 or $35 a month.
The debt snowball really shines when you begin paying off installment loans, like car payments or mortgages. This is due to these credit accounts having fixed payments for the course of the loan. When you pay them off in full you can significantly increase your cash flow to attack other debts more aggressively. Given the national average mortgage payment is $1,029, it makes sense that freeing up this cash flow can really improve your finances. For a look at just how much debt affects the average household in the US, I suggest you check out this post.
Two Strategies Head to Head: Debt Avalanche Vs Debt Snowball
|Debt Avalanche||Debt Snowball|
|Best Suited For||Those who are analytical and want to save the most money. Strictly a numbers decision. Best for self-identified left brain individuals.||Those who are looking for mental victories during their journey. People who look to break down projects into smaller goals. Best for self-identified right brain individuals.|
|Pros||Saves the most money|
The quickest to eliminate all debt
Easy to implement
|Provides more frequent victories|
Keeps the user motivated
Consolidates payments quicker
|Cons||Can feel intimidating|
The savings slow down over the long term
Not beneficial for low-interest debt
|Is not the most ‘optimal’ strategy|
Can take long time for large debts like mortgage
‘Wins’ are focused on beginning of journey
Choosing the Right Strategy
No matter which strategy you choose, or if you use a completely different strategy, it is important to find what works for you. Do not get stuck in the paralysis by analysis. The best thing you can do is to just get started. Begin making extra payments towards your debt and feel the burden lifted from your shoulders.
What do you think about these two strategies? How do you compare the debt avalanche vs debt snowball? Let me know in the comments below!