Debt snowball versus debt avalanche
Get out of Debt

Debt Snowball versus Debt Avalanche

Save & Share with friends & family :)

Are you living paycheck to paycheck? Do you have little to no money in a savings account? Do you wonder how you will afford to retire? Are you overwhelmed with debt wondering how the heck you will get rid of it? You may need to start focusing on paying off your debt once and for all!

Money

According to MarketWatch half of American families are living paycheck to paycheck. This means that 50% of the population is unprepared for an emergency. Nearly 1 in 5 Americans have no savings for an emergency, while 1 in 3 don’t even have at least $500 in savings.

There are many reasons to pay off your debt including:

  • Ending the paycheck to paycheck cycle
  • Reducing stress over financial issues
  • Reducing money fights between couples
  • Building up enough money in a savings account for emergencies
  • Paying off a mortgage early
  • Saving money for retirement
  • Enjoying life more, traveling without stress on how to pay for it

If you are motivated to finally get out of debt but don’t know how to start, then read on! This article will explain various debt pay off methods so that you can decide what approach is right for you on your debt free journey.

What is the Debt Snowball Method

The debt snowball is one personal finance method used to help a person pay off all of their debt. The method has an individual write down all of the debts that they owe in order from the smallest amount owed to the largest amount owed.

Examples of debt a person may have are:

  1. Credit Card
  2. Car Loan
  3. Personal Loan
  4. Payday Loan
  5. Medical Bill
  6. Student Loan
  7. 401k Loan
  8. IRS Debt
  9. Being behind on utility bills

Here is an example of a person’s debt snowball:

 

DebtTotal Owed
Credit card 1$500
Credit card 2$725
Credit Card 3$1,030
Car Loan$15,000
Student Loan$35,000

Keep in mind that each debt also has an interest rate attached to it.

 

Debt

Total Owed

Interest Rate

Credit card 1

$500

15%

Credit card 2

$725

16%

Credit Card 3

$1,030

12%

Car Loan

$15,000

5.99%

Student Loan

$35,000

4%

The debt snowball method encourages a person to list their debts and pay them down according to the total owed and not take into consideration the interest rate.

With this method a person would make the minimum payments on each debt except for the first debt.

On the first debt, the person would make the minimum payment plus put any extra money that they had each month on top of the minimum payment.

In order to see if they have any extra money each month, the person would do a monthly budget and subtract their monthly expenses from their monthly income.

If you need more information on how to do a budget, please read this post on Budgeting for the Beginner. It explains in detail how to do a budget and also provides two free totally customizable budget worksheets.

Once they paid off the first debt, they would then take the minimum payment on the first payment and add it to the minimum payment of the next debt and also add any extra money they had as well.

Let’s say the person discovered they have an extra $150/month, they would then add that onto the $30 credit card payment for credit card 1. It would take them roughly 2.5 months to pay off credit card 1. Once they pay it off, they put $180 (the extra $150 plus the $30 minimum from card 1) onto the now $45 minimum payment and they would pay $225/month on card 2. It would then take them 3.5 months to pay off card 2. With this method it would take them about 6 months to pay off 2 credit cards (pretty cool!).

Example:

 

Debt

Monthly Minimum Payment

Credit card 1

$30

Credit card 2

$45

Credit Card 3

$70

Car Loan

$312

Student Loan

$400

Pros

The great thing about the debt snowball method is that the individual can wipe away small debts quickly, free up extra money in their monthly budget, and potentially increase their credit score quickly as well.

The research shows:

Kellogg School of Management researchers found that consumers who pay off their small balances first are more likely to to pay off their overall debt. The researchers were able to analyze real life data from a debt settlement company. They had 6,000 participants overall. Their analysis showed that the individuals who paid off the smallest debts first were statistically more likely to completely pay off all of their debt.

If you are ready to start your debt free journey, take about 30 minutes to an hour to write out all of your debts so that you can come up with a focused plan. I have included FREE Debt Snowball and Debt Repayment worksheets- click here.

Cons

Looking at it this way, a debt snowball sounds like a perfect way to get out of debt. The downside is that because the individual is ignoring the interest rate on each debt they could take longer to get out of debt and also pay more in the long-term. If you do the math, the debt snowball method is pretty consistent in costing more over the long-term.

What is the Debt Avalanche Method

The debt avalanche is a different method to achieve the same results of getting out of debt. This method has a person list out all of their debts, and just like the debt snowball, pay the minimum on all debt except for the debt on the top of the list. The difference with the debt avalanche method is that the debt avalanche method instructs a person to pay off the debt with the highest interest rate first and then list accordingly. You could also list the debt in order from the highest monthly paid interest.

Traditional Debt Avalanche Method

 

Debt

Total Owed

Interest Rate

Monthly Amount Paid to Interest

Credit Card 2

$725

16%

$9.60

Credit Card 1

$500

15%

$6.25

Credit Card 3

$1,030

12%

$10.30

Car Loan

$15,000

5.99%

$74.90

Student Loan

$35,000

4%

$116.66

Secondary Debt Avalanche Method

 

Debt

Total Owed

Interest Rate

Monthly Amount Paid to Interest

Student Loan

$35,000

4%

$116.66

Car Loan

$15,000

5.99%

$74.90

Credit Card 3

$1,030

12%

$10.30

Credit Card 2

$725

16%

$9.60

Credit Card 1

$500

15%

$6.25

 

If you look at the amount of interest you are paying a month, the student loan costs you more each month than all of the other loans combined just in interest.

Pros

The debt avalanche method is a great way to save money over a long period of time. A person really focuses in on their highest interest rate debt and knocks it down quickly so that their income goes further over the long-term.

Cons

This method can get discouraging if the first debt is thousands of dollars and will take years to pay down. A person can get complacent and not put 110% of their effort to pay down their debt quickly and aggressively.

What do the Experts Say

As you can see, there are a few ways to go about paying off your debt. Some people have a personal preference while others are devoted to their debt payoff method and believe it is the best and only way to pay off debt.

Dave Ramsey

Dave Ramsey is well known for his belief that the debt snowball method is the only way to go. He believes simple is better, and small goals and wins are more motivating over the long run. His motto is personal finance is 80% behavior and 20% knowledge/education.

In his point of view, if a person pays off their debts quickly they are more likely to stay motivated, focused, and aggressively pay off all of their debt in a shorter amount of time. He wants an individual to focus on their behavior modification and not worry about saving money in interest.

He also believes that you don’t tackle the mortgage in the debt snowball method, that comes later in his 7 step plan. According to his 7 step plan you have to also save up $1,000 before you can even start your debt payoff journey.

Suze Orman

Well Suze Orman has complicated the debt payoff a little! Instead of debt snowball versus avalanche she recommends the debt payoff by type of debt. She recommends paying off in order: IRS debt, student loan debt, personal debt, mortgage debt, car loan debt, and then credit card debt. There is an article with detailed information on why she recommends the list in this order and you can access it by clicking here.

When it comes to credit cards it is clear that she recommends the debt avalanche approach and encourages people to pay the credit card with the highest interest rate first. She has a credit card calculator that you can use as a resource to see exactly how much you can save in interest.

What do I say

Okay now it is my turn to give my opinion! When it comes to paying off debt, I don’t believe one method is superior over the other. I think both have pros and cons and the best method to paying off debt is to use a combination approach. Each person’s financial situation is very unique and different. You have to look at all options and then tailor your approach to what will work best for you given your short-term and long-term goals.

Let’s say I’m the person in the example and I have a 600 credit score. Well I would probably focus on paying off the debts that will get my credit score up so that I can refinance my car and get a lower interest rate which would save me a lot of money in the long run. I would also negotiate with the credit card companies to get a lower interest rate. I would pay off the credit cards with the highest debt to credit ratio first because that would help my credit score increase quicker.

Debt

Total Owed

Limit

Debt to Credit Ratio

Credit card 1

$500

$1,000

50%

Credit card 2

$725

$5,000

14.5%

Credit Card 3

$1,030

$1,200

85%

In the example we used above this is how I would pay down my debt so that I can increase my credit score and renegotiate my interest rates with my lenders. I would still tackle the smallest debt first to get it out of the way.

Debt

Total Owed

Credit card 1

$500

Credit card 3

$1,030

Credit Card 2

$725

Car Loan

$15,000

Student Loan

$35,000

Now lets say renegotiating my rates isn’t an option because my credit score is already high or I have so many debts it would take a long time to increase my credit score. I would then probably lean towards the traditional debt snowball in this example because there are 3 debts that could be knocked out in a year.

If my combination method would be too complicated or overwhelming then I would recommend to do the debt snowball approach because you would be psychologically motivated to pay off your debt over a long period of time. You would have a lot of small wins over time which would make it easier to tackle those large debts as they come up, both financially and mentally.

Like I mentioned each person’s situation is completely unique so you might have to evaluate all of the options to see which would you feel the most comfortable with. You can always try out one method and then switch things up over time.

Debt Snowball

Resources

Here are 3 different Debt snowball calculators that you can use to get an idea of your personal debt snowball. Just plug in the numbers!

Debt snowball calculator 1

Debt snowball calculator 2

Debt snowball calculator 3

Conclusion- What Can Getting out of Debt Solve

Let’s face it, getting out of debt is hard work! We can accumulate a lot of debt easily in our society. Once we begin to realize how our debt is holding us back in life, we understand how important it is to pay off debt quickly.

Getting out of debt saves money (think interest payments over the years), it allows a person to save money in case of emergencies (job loss, death of partner, divorce), and it enables a person to build wealth (401k, investments, stocks, real estate).

If you are ready to start your debt free journey, take about 30 minutes to an hour to write out all of your debts so that you can come up with a focused plan. I have included FREE Debt Snowball and Debt Repayment printables.

These printables will help you organize and focus on your debt payoff journey so that you always stay on track and get that debt paid off quickly!

Debt Repayment Worksheet
Debt Snowball Worksheet

Thank you for reading!

If this post was helpful, please share it with others on Pinterest & Facebook!

For more Finance Tips, please follow me on Pinterest

xoxo, Kylie

Save & Share with friends & family :)

Click here to read related posts

8 Comments

  1. YES YES YES!!!!! We are on month 7
    Of our debt snowball. GREAT article

    1. Kylie says:

      Mellisa,

      That is awesome! Keep up the great work 🙂

      Kylie

  2. I must admit that before this, I didn’t really understand the avalanche versus the snowball method. Thanks so much for making things so clear and simplified.

    1. Kylie says:

      Hi Joleisa,

      I’m so glad to help you understand it! My goal was to break it down to be as easy to understand as possible, glad it helped you 🙂

      Kylie

  3. I’m not sure where you’re getting your information, but good topic.
    I needs to spend some time learning more or understanding more.
    Thanks for magnificent information I was looking for this
    info for my mission. http://Highlandavenuerestaurant.com/

    1. Kylie says:

      Hi there,

      Thanks for the feedback! If you click on the links it will take you to the source where I found my information. I hope this article helped!

      Kylie

  4. Well explained! I’m going to reference this post in an upcoming post on my blog. Will let you know once I have it up 🙂

    1. Kylie says:

      Okay that would be awesome, thank you! 🙂

      Kylie

Leave a Reply

Your email address will not be published. Required fields are marked *