What Snowballs and Avalanches Have to Do with Debt

If you have debt, you’re not alone. 43 million Americans carry student loan debt. And the average person between 18 and 65 has nearly $5,000 in credit card debt.

There’s no doubt that debt is a part of financial life for many of us. But it doesn’t have to be this way. The road to debt freedom starts with creating a plan of attack so you can get organized and strategically attack and repay every last cent.

Two effective ways to do this are the debt snowball and the debt avalanche.

Roll Away Debt with the Debt Snowball

The “debt snowball” is a method of debt repayment popularized by personal finance guru Dave Ramsey. Ramsey promotes several books, products, and systems, but you don’t need to buy anything to use this idea.

Here’s how it works: you tally up all of your debts by their balances. For example, if you had a student loan with a $10,000 balance, a car loan with a $2,000 balance, and a credit card with a $5,000 balance, you would order your debts like this:

1. Car loan, $2,000
2. Credit card, $5,000
3. Student loan, $10,000

This is the order in which you repay all your debt. You start with the debt with the lowest balance, and once it’s paid off you move to the debt with the second-lowest balance. In this way, you “snowball” -- you slowly build momentum as you knock out debt after debt.

You want to make sure you make the minimum payments on all your loans, but beyond that, all the money you have available for debt repayment goes to one debt at a time. Once you pay off the first loan, take all the money you used to make those payments and put it toward payments on the second loan, and so on.

Benefits and Drawbacks of the Debt Snowball

This method works well because of the momentum you build as you go. Many people find it really motivating to quickly wipe out an entire balance and be done with it. Because you start with debts with the lowest balances and work your way up, you get faster “wins” when you begin since it takes less time to pay off the first and second balances.

This is all about your behavior and how you feel about your debt, but it works. So much of personal finance doesn’t have anything to do with the numbers and everything to do with how we behave. The debt snowball method may make sense for you if you need to see faster progress in order to stay motivated and stick to the plan.

But you can’t ignore the financial reality: using this method may cost you more money in the long run. That’s because the debt snowball doesn’t take into account the interest rates on your balances.

If you pay off your debt in order of lowest balance to highest, you may end up getting rid of low-interest rate debts first instead of debts with high-interest rates. And the higher the interest rate, the more money you pay over the time you hold the balance.

If you’re more motivated by the numbers than the quick wins you get when you knock out small loans right away, consider a different debt repayment method.

Crush Your Debt with the Debt Avalanche

One of the most cost-efficient ways to repay your debts is to use the debt avalanche method. If you want to use this strategy, it’s not the balances of your debts that are important: it’s the interest rates.

Order all your debts from highest interest rate to lowest. You’ll start by working to repay the debt with the highest interest rate first. That’s because it’s costing you the most money each and every month thanks to the money you pay in interest.

Again, make sure you’re making the minimum payment on all your debts. But focus any additional funds you can allocate toward debts with the highest interest rates first.

The benefit here is obvious: over the entire time you repay your debt, you’ll save the most money if you get rid of balances with high rates first. But the debt avalanche isn’t for everyone because it can feel overwhelming. You may need to start with a loan with a really big balance, and you don’t get the quick hit of motivation that comes with wiping out a smaller loan sooner.

Should You Snowball or Avalanche?

There’s really no wrong way to repay your debt if you create a plan and stick to it. The key is determining which method works best for you.

If you struggle to stay motivated and feel easily overwhelmed by your debt, consider the debt snowball. You get to focus on your smallest debt first and knock it out as quickly as you can. Doing so may provide you with the motivation you need to keep going since you can see you can do this.

And if you’re more concerned with the long-term outcome and want to do what’s financially best by the numbers, use the debt avalanche. You’ll knock out debts by interest rate, and over time, you’ll spend less money.