In this post, we’ll break down the two most effective debt repayment strategies—debt avalanche and debt snowball methods to help you figure out which one is right for you.
You’ll also get to hear about a couple on my podcast working their way out of $400,000 in debt.
TL;DR: Debt Avalanche vs. Debt Snowball
Here’s a quick breakdown of each approach to help you decide:.
- Debt Avalanche: Focus on paying off debts with the highest interest rates first. This method saves you the most money in the long run and is best for those who are disciplined and patient, as it can take longer to see significant progress.
- Debt Snowball: Start by paying off your smallest debt first. This method provides quick wins, helping you stay motivated. It’s ideal if you need those early victories to keep going.
What is the debt avalanche method?
The avalanche approach to debt repayment involves making the minimum payment required on every debt you owe every month. Any remaining money for your debt repayments then goes toward the debt with the highest interest rate. As soon as you pay off this debt in full, you then allocate that monthly extra to the next highest-interest debt. You continue the cycle until all debts are paid off.
An example of the debt avalanche method
An example can help clarify how the debt avalanche method works. Let’s say you have three debts you’re working to pay off: a student loan, an auto loan, and a credit card. Each one has a distinct balance, an annual percentage rate of interest, and a monthly minimum due. Here’s a breakdown:
- The student loan has a balance of $30,000, an APR of 5.95%, and a monthly payment of $550.
- The auto loan has a balance of $10,000, an APR of 3.99%, and a monthly payment of $400.
- The credit card has a balance of $8,000, an APR of 14%, and a monthly payment of $200.
Let’s say you have $350 in extra money remaining for debt payments every month. In this case, you’d put that $350 toward the credit card balance. Once that first debt is paid off, you can tackle the student loan — the debt with the next highest interest rate.
Pros and cons of the debt avalanche method
Understanding the advantages and disadvantages of the debt avalanche method can help you determine if it’s right for you. Here are some of the pros:
- Saves money: By tackling debts with the highest interest charges first, the debt avalanche method allows you to save money long term. You can knock out high-interest debts before they grow too unwieldy.
- Efficient: The debt avalanche method can also shorten the total amount of time it takes to pay off all of your debts. By addressing high-interest loans first and paying them down as quickly as possible, you keep debt from growing, which means it’s paid more quickly.
That said, there are also drawbacks. These include:
- Requires discipline: It takes significant commitment to successfully implement the debt avalanche method. Also, you aren’t guaranteed the more immediate gratification that comes with the debt snowball method, which allows you to check your smallest debt off your to-do list first (more below).
No quick wins: Targeting high-interest debts instead of your smallest debts means you might be chipping away at one single debt for an extended period. This can get disheartening compared to the quick win you get when paying off the smallest debt first.
What is the debt snowball method?
While the avalanche method focuses on targeting the debt with the highest interest rate, the snowball method targets the debt with the smallest balance. Following this method, you likewise make the minimum payment required on every debt you owe, every month. However, any remaining money for your debt repayments then goes toward the smallest debt you have (instead of the one with the lowest interest rate).
The logic is that you’ll be able to knock this debt out more quickly than the others, gaining momentum (and motivation!) as you progressively pay off your debts. Once you pay off one debt in full, you then move on to the next debt with the lowest balance. Note that a mortgage (if you have one) is excluded from this approach.
An example of the debt snowball method
Again, let’s say you have three debts you’re working to pay off: a personal loan and two different credit card debts. Each one has its own balance, APR, and minimum monthly payment due. Since interest rates aren’t a factor with the debt snowball method, we’ll just focus on the debt balance and minimum due. Here’s an overview:
- The personal loan has a balance of $10,000 and a monthly payment of $250.
- Credit card No. 1 has a balance of $5,000 and a monthly payment of $60.
- Credit card No. 2 has a balance of $12,000 and a monthly payment of $170.
Let’s say you have $320 remaining to go toward debts every month. Following the snowball method, you would put that $320 toward credit card No. 1, which has the smallest balance. Once that’s paid off, you’d move on to the next smallest debt, the personal loan.
Pros and cons of the debt snowball method
The snowball method has its own set of pros and cons to consider when determining which debt repayment method is right for you. The advantages include:
- Motivational: Multiple different debts can be overwhelming. Whittling down your list of IOUs efficiently can bring great peace of mind. As you pay off your smallest debt first, you’re also more motivated to tackle the next one.
- Simple: The snowball method is super easy to implement. You don’t have to look at APRs or track how they’re changing (in the case of variable rates). You can simply look at each debt’s balance and structure your payments accordingly.
- Confidence-boosting: Debt can be extremely overwhelming. Knowing you’ve successfully paid off one debt can give you greater confidence. When it comes to smart money management, this is generally a plus.
Meanwhile, disadvantages of the debt snowball method include:
- More expensive over time: When you focus on debt balances instead of interest rates, you run the risk of high-interest debts growing. So, you may end up paying more over time.
- Inefficient: Ultimately, the snowball method may mean you’ll need more time to pay off all of your debts. This can happen if you have larger debts with high interest rates, which will continue to accrue interest and grow while you focus on repaying smaller debts.
What is the main difference between the avalanche method versus the snowball method?
Remember, both methods require you to pay off the minimum monthly payment on all of your debts every month.
Where they differ is which debt you should focus on paying after those minimums are met. The debt avalanche method requires paying off the debt with the highest interest rate, while the debt snowball method requires paying off the debt with the smallest balance.
Which method should you use?
I’ll be honest, there is no one right answer. Mathematically, the debt avalanche method might seem superior since it can save you money on interest and improves the odds that you’ll become debt-free sooner.
However, successfully paying back all the lenders you owe isn’t just about having the cash — it’s also a psychological game. That’s where the snowball strategy has a distinct advantage. By allowing you to cross off your smallest debt quickly, this debt reduction strategy allows for quick wins, which can be hugely motivating and can give you the boost you need to continue to pursue your payoff strategy.
Paying down debt is largely about psychology. In fact, smart money management as a whole is about psychology. For example, take budgeting. If you feel you’re always restricting your lifestyle because of a budget, the odds are you’ll end up breaking it. A life of constantly saying “no” simply isn’t sustainable for most of us.
However, if you follow a conscious spending plan instead — allowing yourself to spend guilt-free on your favorite pleasures — you’re more likely to stick to it. Successful money management is largely about understanding your money dials — the things you’re really excited to spend money on — and allowing yourself to spend on those without guilt.
Likewise, choosing a repayment plan is a matter of understanding your own psyche. If you have the diligence to pursue the avalanche method, give it a try. If it’s a challenge, you can switch to the snowball debt payoff method. The bottom line is that either strategy will get you closer to debt relief and improve your credit score. There are also other ways you can take down debt, such as via debt consolidation.
Why it’s important to have a debt repayment plan
Having a clear debt repayment plan is crucial to avoiding deeper financial trouble. Without a plan, it’s easy to lose track of payments, accrue more interest, and damage your credit score. By choosing a method and sticking to it, you’re more likely to stay on track and achieve debt freedom.
Just take a look at the situation Kenna and Ryan found themselves in when they didn’t handle their debt correctly:
[00:00:20] Ramit: But you only have $50 in savings now.
[00:00:23] Ryan: Yes. I’m a frivolous spender. I will just buy stuff. Break my back to buy my kids whatever they need.
[00:00:30] Ramit: Because what does it mean to you?
[00:00:33] Ryan: Everything. It means that I’m providing for them. It means that I’m not going to hit rock bottom. I’m not going to fail. I’m going to do whatever I have to. How could you not grind so hard to get what you can for your kids? It’s just so annoying that we even allowed ourselves to get into this position.
Despite only having $50 in savings, they couldn’t say no to their children, even when the money came straight off their credit card. Not only that, but Kenna and Ryan have very different views on money and spending.
[00:01:49] Ramit: So who wants to go first and tell me the way that you view money in a sentence or two?
[00:01:56] Ryan: It’s just a way for me to have fun while I’m living my life.
[00:02:00] Kenna: And I feel like I will never have enough.
[00:02:04] Ramit: Hmm.
[00:02:06] Kenna: Or anything.
[00:02:07] Ramit: They seem opposite, don’t they?
[00:02:09] Kenna: Oh yeah.
[00:02:11] Ramit: When did you discover that you had different views of money?
[00:02:14] Ryan: Very early on.
[00:02:15] Kenna: Do you think so?
[00:02:18] Ryan: Well, you were managing the finances prior to us even getting engaged because I’m a sloppy spender.
[00:02:24] Ramit: And what was the last time the two of you had a specific disagreement about money? Can you remember that?
[00:02:33] Ryan: I mean, all the time. Like Christmas time, she wants to have a budget, $200 hard for each child. And I’m like, well, what if I see something that I want to get them and we’ve already spent the $200? I should be able to go get that for them if I want. I’m a spender. I’m a frivolous spender.
[00:02:52] Ramit: Hmm. What does frivolous mean?
[00:02:54] Ryan: I will just buy stuff.
[00:02:55] Ramit: Uh-huh.
[00:02:56] Ryan: Just to buy it. Whatever. Disc golf stuff. I already have everything I need for disc golf. Everything you could ever want, and I’ll buy other stuff. And then it just sits around and I don’t use it, but I have it.
[00:03:09] Ramit: Okay. And with that Christmas example, 200 bucks per child, what ended up happening?
[00:03:19] Ryan: We went over the budget.
Eventually, they realized that there was a way out of it, and once they got out, they would have so much more money to spend smartly on better activities.
[00:54:14] Ramit: You spent more money than you made. And I would be willing to bet that you’re spending a comparable amount most months, even though Christmas was in December, there’s probably something that happens in July, etc, and sometimes there’s a big expense that blows up and we have to amortize or spread that out. So you’re probably spending around a 1,000 to 1,500 bucks extra per month than you even reflect here.
[00:54:43] Kenna: I could see that.
[00:54:44] Ramit: What do you think about that, Ryan? I see you just staring off into space right now.
[00:54:47] Ryan: I am not staring off into space. It’s just so annoying that we even allowed ourselves to get into this position.
[00:54:54] Ramit: Yeah.
[00:54:56] Ryan: It’s like we both, like– I think we both consider ourselves semi-intelligent people, and it’s like you can see yourself going down the path and you just don’t stop it. You just let it go and then, oh, whatever. We’ll deal with it at some point. I mean, I’ve even told her before. I’m like, well, we just make the minimum payments and then when we sell this house, we’ll just use the equity from this house to pay off the credit card debt, and then we’ll be at zero again. And then her next answer or next statement is, yeah, until we get another credit card and then do this whole thing over again. And then I go, no.
[00:55:29] Kenna: Which was why cutting the cards–
[00:55:30] Ryan: We don’t do this over again.
[00:55:32] Kenna: Which is why cutting the cards–
[00:55:34] Ryan: Dig ourselves out this time, and that’s it.
[00:55:36] Ramit: Okay.
[00:55:38] Ryan: And then instead of a $1,000 going towards our credit card debt, a $1,000, not even a 1,000, $700 could go to a retirement account and $300 a month can be for us to eat out. If we don’t– uh, just foolish in my younger years.
It’s clear that Kenna and Ryan’s journey illustrates how critical it is to have a solid debt repayment plan. They struggled with overspending and conflicting views on money, but once they realized the impact of their debt, they began to see the potential for a more secure financial future.
Whether you choose the debt snowball or avalanche method, the key is to start now, stay consistent, and prioritize your financial goals. You can listen to their full episode here.
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