With the debt avalanche, you pay off your debts in order by interest rate. It’s also sometimes called the “high interest rate” method. With the debt snowball, you pay off debts starting with the lowest balance. Each method has its pros and cons, so before deciding how to tackle your own debt, it’s important to understand what each strategy entails and why one method may be better for your own situation.
What’s the Difference Between the Debt Snowball and Avalanche?
For example, you might owe:
Mastercard, $2,500: 19%, highest interest rateVisa, $7,500: 13%, second-highest interest rateCar loan, $4,000: 8%, third-highest interest rateStudent loan, $1,900: 5%, lowest interest rate
To get started, you will make the minimum payment on all your loans. Then, you should throw all of your extra money toward paying off your your highest interest rate debt. That’s the Mastercard in our example, which has the highest interest rate at 19%. The idea is that the sooner you shrink and eliminate that 19% debt, the less you’ll pay in compound interest. Once you’ve wiped away your Mastercard debt, tackle the Visa balance, which has the second-highest interest rate, at 13%. It’ll take you a long time to repay the Visa, since it has the highest balance, at $7,500. Stick with it. Whenever you’re done, you can start paying off the debts with lower interest rates. You may feel frustrated after investing so much time and energy toward paying down a loan without feeling the mental victory of crossing it off your list. That’s where the debt snowball comes in.
The Debt Snowball Method
According to the snowball method, you should throw every spare penny toward paying off the loan with the smallest balance first, regardless of the interest rate. If you used the snowball method, you would re-order the list above as follows:
Student loan, $1,900: 5%, lowest balanceMastercard, $2,500: 19%, second-lowest balanceCar loan, $4,000: 8%, third-lowest balanceVisa, $7,500: 13%, highest balance
As with the avalanche method, you’d make the minimum payment on all your loans. Then, you’d throw every extra penny toward the debt with the smallest balance, regardless of the fact that, in this particular case, it also has the lowest interest rate. While this method gives you a more immediate feeling of victory, it might cost more. Making only minimum payments on your highest-interest debt means you’ll pay more in interest, as compared to the debt avalanche method.
The Bottom Line
Personal finance is just that—personal. Paying off debt can be a little like dieting. Sure, there are ideal eating plans out there, but let’s be realistic: Most people aren’t going to stick to a perfect diet. The best diet is the one you’ll stick to. Paying off debt is similar. Be honest about making a budget that fits your personality and keeps you motivated. You’ll pay the most in interest if you don’t stick with your debt payoff plan. Having a plan is a good idea, but that doesn’t mean you need to hold yourself to it 100% of the time, 365 days of the year. Things change, life throws curve balls at you, and you need to adapt. That sometimes means changing your financial strategies. Don’t beat yourself up if the first method you try doesn’t work. Keep at it until you find something that does.
