The Debt Snowball vs. The Debt Avalanche: the fastest method to pay off debt

3 min read

Anthony O'neal
The Debt Snowball vs. The Debt Avalanche: the fastest method to pay off debt

We've talked about the debt snowball and briefly mentioned the debt avalanche method, but what sets them apart and why is one significantly more effective at paying off debt than the other?

Let's take a deep dive into the difference between the debt snowball method and the debt avalanche method - what they are, how they are helpful or hurtful for paying off debt, and examples of both.

What is the debt snowball method?

The debt snowball method is a way of paying off debt by making minimum payments on all your debts except the one with the smallest amount, that one you throw as much extra money on each month until it's paid off. From there you take the amount you were paying on that one and add that to the minimum payment of the next smallest debt - from there it "snowballs" and next thing you know you're living debt free.

Let's break it down a little more so it's easier to swallow.

Write down all your debt

In order to tackle the debt snowball method efficiently, you want to make a "list" of all your debt - but we are only focusing on the amount of each, we don't need the interest rate or any other information. Once you create this list, take a look at what debt has the smallest amount and look at the minimum monthly payment for that particular one and determine how much you can add onto that payment a month. Doing this will pay down your debt faster and give you a great psychological boost when paying debt.

Continue this on the rest of your debt, from smallest to largest

Once that first small balance is paid off, you'll take what you were paying on that and add it to the minimum payment of the next smallest debt - ideally this would add an extra $100-$250 a month to your debt payment. Repeat this process on the next smallest debt until low and behold, you're finally debt free.

Visual example of the debt snowball method

  • Debt 1: $20,000 medical bill | $60 minimum payments
  • Debt 2: $9,000 car loan | $150 minimum payments
  • Debt 3: $10,000 personal loan | $180 minimum payments
  • Debt 4: $16,000 student loan | $200 minimum payments
  • Debt 5: $2,000 credit card | $55 minimum payment

First you want to take your $2,000 credit card and pay the minimum of $55 per month plus as much money extra as you can, let's say you can add $150 to that making the total payment of $205 a month. You will have that credit card paid off in about 10 months.

Once that's paid off take that $205 and apply it to the $9,000 car loan plus the $150 minimum for a total payment of $355 a month. Again, once that's paid off take the $355 plus the minimum of $180 for the $10,000 personal loan for a total monthly payment of $535. This

This cycle repeats until you're debt free.

What is the debt avalanche method?

The debt avalanche method is when you're taking your debt and paying off the debt with the highest interest rate first, then cycling down to the debt with the lowest interest rate. In the debt avalanche method, the amount owed has nothing to do with how you should pay it off, it's all about the interest rate.

Let's break it down further like we did with the debt snowball.

Write down all your debt, including interest rates

Instead of writing down your debt and only focusing on the amount owed, this time you'll want to focus only on interest rates. List out all your debts and their corresponding interest rates, then you'll look at the one with the highest interest rate and make the monthly minimum payment on it until it is paid off. Once that's paid, you'll move on to the debt with the next highest interest rate and make the monthly minimum payments, until that's paid off.

Continue this on the rest of your debt from highest interest rate to lowest

You're going to continue this process until all your debt is paid off, but you're always going to be paying on the debt with the highest interest rate - which small debts typically don't have high interest rates, it's the larger debts that rack up total interest.

Visual example of the debt avalanche method

We're going to use the same debts as before, but instead we're only focusing on interest rates.

  • Debt 1: $20,000 medical bill | 20% interest rate
  • Debt 2: $9,000 car loan | 17% interest rate
  • Debt 3: $10,000 personal loan | 5% interest rate
  • Debt 4: $16,000 student loan | 4.25% interest rate
  • Debt 5: $2,000 credit card | 4% interest rate

So with these interest rates, you're going to start to make minimum payments on the $20,000 medical bill, until it's paid off. If we look back at the monthly payments of $60, you'll have this debt paid off in way longer than necessary. You're starting out with the highest debt and the highest interest, so it's not rewarding to pay on because it's hard to see the results quickly and it doesn't give our brain that rush of dopamine to stay consistent and motivated to pay off debt.

In theory, after that medical bill is paid off, you'd move on to the $9,000 car loan, making the minimum payments until it's paid off, and then moving on down the line. So what's the difference?

Debt snowball vs. debt avalanche

When each method is broken down like this, it doesn't take a personal finance expert to see where the problem lies. Both methods will help you pay off your debt, but only one method ends up giving you the reward of freeing up your financial situation in a timely manner and giving you those quick wins.

Debt snowball - best strategy

As we can see with the debt snowball, because of the strategy behind it, you really get the "snowball" rolling by paying off consumer debt, tackling the lowest balance first and moving to the highest balance once you've freed up some money.

The balance calls the shots in this method and gives you the power to tackle loans and debt quicker. Start with a small balance, put as much money into as you can afford and watch how quickly you can pay it down. Take that same amount and apply it to the other debts you have with the lowest balance, and you start to see the future of being completely debt free.

Using this method to pay debt, no matter if it's your car payments, credit card balance, student loan, or personal loans, this method allows you the satisfaction of seeing the progress, the light at the end of the tunnel and the ability to get out of debt in as quick as 18-24 months.

Debt avalanche - the real life nightmare

You start with paying the highest interest rate which usually correlates to the highest amount owed, you see the money going into your payment, but you don't see the balance decreasing as quickly as you'd like, or as quickly as it takes to keep you motivated.

The problem with the avalanche methods is that the first debt takes so long that the next debt is almost invisible - there is no light at the end of the tunnel and you start to get demotivated and less likely to keep up.

High interest debt + minimum payment + debt avalanche system = debt repayment nightmare

Debt should be avoided at all costs, but if you have it and are trying to truly be completely debt free, this is not the method that works nor do I promote it. It only causes damage to your consistency, confidence and personal finance, nor does it allow you a space to prepare for the future and save money.

Let's Recap

Both the debt avalanche and the debt snowball method can be used to pay debts. While debts of any kind should be avoided, the debt snowball method is the quickest and most rewarding way to pay off your debt and free up your finances.

The biggest difference between the two is that the snowball method utilizes paying on the debts with the smallest balance first and then moving up to the larger balance. This keeps you consistent and motivated because you're able to see results fast and it's extremely satisfying to see the light at the end of the tunnel when it comes to getting out of debt.

In comparison, the debt avalanche method utilizes paying on the debts with the higher interest and working your way up to the smaller interest debt. This method tends to demotivate you because it forces you to start with the highest amount owed and it's hard to see any progress, let alone fast progress. It doesn't allow you to see the light at the end of the tunnel and this method takes way longer to reach your goals.

So, while all debt should be avoided, if necessary it's best to use the debt snowball method in order to pay off debt, start to save money, and build a future of wealth for yourself. 

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