Debt Snowball vs. Debt Avalanche: What’s the best way to pay off debt?

Are you ready to tackle your debt? 

The decision you’re making is life changing. But when it comes to becoming debt-free, it isn’t always so black and white.

You’ve probably heard a thousand pieces of advice on how to pay off debt fast:

Start with the smallest balance.

No, start with the highest interest rate.

No, focus on repayment times instead.

Does it get a bit confusing? Let’s go back to the basics today. Let’s help you choose a plan to kill your debt.

Sound good?

Debt Snowball vs. Debt Avalanche

The Debt Snowball

The debt snowball focuses on the smallest balance.

The idea is simple:

List your debts from smallest balance to largest balance. Pay as much as you can towards the smallest and make minimum payments on everything else.

Once the smallest debt is paid off, keep working your way up until you’re debt-free.

Why is this method powerful?

Because most people have several little debts lying around. Maybe $200 owed to Target here or $180 to Amazon there.

It gets overwhelming, doesn’t it?

So the debt snowball focuses on clearing away the little debts quickly – which makes it ideal for learning how to pay off debt fast.

The best part?

You might be able to get rid of an entire debt each month for the first few months.

Think about it:

Once you start seeing progress, you’re able to tell yourself, “I can do this.”

Those powerful little “wins” keep you going.

So for my visual readers, here’s the debt snowball:

For simplicity, let’s say you have 3 debts. A Target card, MasterCard, and a car loan.

You start by arranging your debts from the smallest amount to largest amount.

Then, you would:

• Focus on the Target card first by throwing AS MUCH money as possible at it 
• Pay the minimum on your Mastercard ($75)
• Pay the minimum on your car loan ($200)

In this example, you had enough money to get rid of the Target card in the first month.

Next, you’d take the $535 payment and add it to the minimum payment of the MasterCard.

And this is what you’d eventually end up with:

By the time you get to the car payment, you’re throwing a whopping $810 at it each month.

Your payments increase each time you pay off debt. This builds the snowball.

So thanks to Dave Ramsey, and his book The Total Money Makeover, this method has helped thousands of people become debt free. Now let’s move onto the next method.

The Debt Avalanche

The debt avalanche focuses on the highest interest rates.

The idea is straightforward:

List your debts from highest interest rate to smallest interest rate. Pay as much as you can toward the debt with the highest interest rate. Make minimum payments on the rest. 

This method works because:

Mathematically it makes the most sense.

You’ll pay less in interest if you tackle your debts using the debt avalanche method.

And what does saving money on interest mean? You’ll become debt-free faster. (Usually by a few weeks or a couple of months)

So for many people, this is the best method to pick if you want to learn how to pay off debt fast.

Let’s take a look:

In this example, you:

• Focus on your MasterCard first – pay it off
• Next, you’ll move on to the Target card – pay it off
• Finally, you’d tackle the car loan

And this is what you’d end up with:

 

So which method works for other people?

Do you want to know what other people think? I knew you would. So I asked my readers:

What’s working for you? And why?

Here’s what they said:

“I would rather get out faster and save money so I’m using the debt avalanche method.” -Daniel

Winner: Debt Avalanche

“Snowball is better because of the mental aspect of it. If we had the mental to avoid debt in the first place, we wouldn’t have these problems.” -Rebecca

Winner: Debt Snowball

“I use the debt snowball because it’s about behavior modification! Pay off smallest to largest and you will be on fire to stay motivated and keep pushing forward. Gazelle intense!” -Jamie

Winner: Debt Snowball

“I started with the snowball to get the mentality on point. I paid off two small credit cards. Then I switched to avalanche once the habit was formed and it’s working beautifully.” -Jeremy

Winner: Used Both

“I prefer seeing my progress using the debt snowball, or else I might have a harder time staying motivated.” -Ashley

Winner: Debt Snowball

What does the research say?

Still on the fence?

Let’s talk about the research.

In a nutshell:

The rational thing to do would be to choose the debt payoff method that saves the most money (the debt avalanche method).

But the research says that humans aren’t rational creatures.  So the debt avalanche is ideal for someone who is committed to learning how to pay off debt fast.

But, according to several studies, that’s not the best method for most people.

Let’s breakdown the research:

Northwestern University: 

This 2012 study showed that people are more likely to stick with their debt payoff plan if they focus on the smaller balances first.

“This debt snowball approach is believed to increase the likelihood of getting out of debt, as it keeps people motivated through small victories.”

Winner: Debt Snowball

The Journal of Consumer Research:

At the Harvard Business Review, researcher Remi Trudel says he found the debt snowball method to be more effective.

Here’s what he found:

“Focusing on paying down the account with the smallest balance tends to have the most powerful effect on people’s sense of progress – and therefore their motivation to continue paying down their debts.”

Paying down larger debts first, by contrast, is less effective, the study found because people get discouraged when they don’t see a noticeable improvement.

Winner: Debt Snowball

Texas A & M University:

“In the area of financial decision-making, self-control issues are significant and can plague even the most financially literate,” said Alexander Brown and Joanna Lahey.

“The standard approach advocates paying off debts in order from highest to lowest interest rates because mechanically this method results in the least amount of money paid to interest.”

The problem – again –  that they point out is:

“People tend to be highly irrational and favor what feels good over what works best.”

“People also tend to be easily overwhelmed by large amounts of debt and perform better when tasks are broken up in smaller pieces.”

Winner: Debt Snowball

What’s best for you?

So you know what the research says…but what should you do?

Here’s the bottom line:

Personal finance has a lot to do with psychology.

So even though it might make more sense mathematically to use the debt avalanche, it’s more promising to use the debt snowball.

So for that reason, I recommend the debt snowball to most people.

But personal finance is personal. So if you’re still not sure which method to pick, here’s some advice:

 

• Do the math first. Use a Snowball vs. Avalanche calculator to estimate how long each method would take and how much interest you’d save.

 

•  Try to make the rational choice. If the debt avalanche will save you thousands on interest, then see if you can stay on track with that method first. 

 

• Keep tabs on your motivation. If you find yourself struggling while doing the debt avalanche, try knocking out a couple of smaller balance debts to get a quick energy boost.

 

• Start with the snowball then switch to the avalanche. I had a few readers say they knocked out the pesky smallest debts first, then switched to the avalanche method to take care of the bigger ones with higher interest rates. 

Either way, both methods reach the same goal:

You become debt free.

But guess what?

Your plan only works if you do. So pick your plan and work your plan. Nobody can do this but you.

Make a choice. Start today. That’s how change begins.

Are you ready?