To me, paying down debt is really a matter of psychology. If you compare debt payoff to things like dieting or exercising, the methodology is really the same. You have to find a method that works the best for you and create a habit you can stick to.
This mentality actually helped me pay down the first $10,000 of my student loans within two years of graduating. While I was in college, I started paying down the interest on my loans whenever I could. I kept that habit from my sophomore year onwards and made sure to toss a little extra at the loans whenever I could.
Paying down debt and saving money should be looked at as a long-term lifestyle change. That is why this post doesn’t just share two of the popular debt payoff methods. I will also share the reasoning behind why the method works so you can choose the best one for you!
Read on to find your answer to the Debt Snowball vs. Debt Avalanche debate!
What is the Debt Snowball Method?
The Debt Snowball Method is a strategy used to pay off your debt by tackling the loans with the lowest balance first.
This method is impactful because it enables you to see quick wins that can keep you motivated to continue paying things down. Sounds good, right?
You are probably wondering, “Why is it called the Debt Snowball?”
To understand the meaning of “Debt Snowball”, try to visualize yourself standing at the top of a mountain holding a perfectly formed snowball. As you keep adding snow to the snowball, it gets bigger and bigger. Finally, it is so big that you set it on the ground and push it off the mountain.
As the snowball rolls down the mountain, it collects more snow and debris along the way. This makes the snowball bigger and it rolls faster down the mountain as it grows! The momentum becomes so great that the snowball is able to get rid of everything in its path.
In a similar way, this method works by helping you maintain momentum. With every small win, you get excited to tackle the next loan! This helps you stay on track and eventually pay off the more significant debts.
This is How the Debt Snowball Works
There are four steps when using the Debt Snowball Method. This way of debt repayment is pretty easy to start, and depending on your debts, you may be able to pay them off faster than you had thought possible.
Step 1: Make a list of all your debts.
Once you have a list of all the debt you have, whether written down by hand or on your computer, it’s time to organize. Rearrange the list of your debts from the smallest amount owed to the largest amount owed. We are not focusing on the interest rate here, only the sum of the debt.
Be sure to include all of your debts, except for your mortgage. Debts can include, but are not limited to:
- Credit cards
- Loans (personal, student, car, etc.)
- Medical debts
- Money owed to family/ friends
Step 2: Make all minimum payments.
Let’s start this step off with a very clear statement that you need to make minimum payments on all of your debts. Skipping payments only to pay your smallest debt is not part of the Debt Snowball Method. Missing a payment is never a good idea as it negatively impacts your credit score.
Figure out what the minimum payment is for each debt and write it down beside the corresponding debt. Every month you will pay all minimum payments on all your debts.
Making the minimum payments will not pay off the debt or even bring you closer to paying off said debt, but it will keep the sum from growing and affecting your credit.
I also highly recommend asking all of your creditors to switch your due date so that they all fall on the same day.
This decreases the likelihood that you will accidentally miss a payment. It is usually a good idea for the date to be 3 days after your first payday of the month. This is so that you know the money will be in your bank account when your bills are due and you can use your second payday for rent!
Step 3: Pay as much as you can on small debt.
Now that you have your minimum payments sorted out and your budget defined. It’s time to start making extra payments on your smallest debt. You may need to cut back on other areas in your budget to have extra money to funnel into your debt.
Remember, this won’t be forever and any little bit extra will help!
You could even look into starting a side hustle or ways to make passive income to have a little more money to pay down the debt without impacting your budget. If you are looking for ways to get started, I recommend my articles on how to make $100 in a day and how to save your first $1,000 in a month.
Step 4: Cross it off your list.
It will feel good to pay off that small debt and put a big checkmark beside it. This step is where the momentum comes in to create that “bigger” snowball.
Now it’s time to move onto the next debt. Use the minimum payment from the previous debt plus any extra cash you may have to start paying down the next debt.
Each time you move onto a new debt, use the minimum payment from the previous debt as extra money to put into the payments of the next debt on your list.
This will add up as you go on and help to keep the momentum going! Since this money was already accounted for in your budget, you will likely not even notice the impact on your lifestyle.
Is the Debt Snowball a good idea?
The Debt Snowball Method is a good idea if you feel a bit demotivated about tackling your debt. It can really help you build excitement as you start to see results, no matter how small they may be.
This method is also great if your interest rates are all pretty similar. That is why I’ve been using this method to pay off my student loans! Since all of my loans are between 3 to 4 percent, I will only save a little interest by prioritizing the higher interest rates.
Since the Debt Snowball Method makes me so excited, I end up paying things down even faster than my set goals!
This is important to note because, if you look purely at numbers, this method actually takes slightly longer than if you were to prioritize paying down loans with the higher interest rate first as you would in the Debt Avalanche Method.
My thoughts on the Debt Snowball Method
Overall, I am a huge fan of the Debt Snowball Method as it really plays into the psychology of how we look at our money. If you have a lot of debt, then you may want to consider consolidating your loans instead as having one monthly payment may be easier than this method.
If you have debt with high or variable interest rates, then I would definitely recommend learning more about the Debt Avalanche Method below.
What is the Debt Avalanche Method?
The Debt Avalanche Method is another strategy used to pay off debt. This method focuses on targeting the debts you have, starting with the highest interest rate. By paying off loans based on the highest interest rate first, you will save money in interest incurred on the debt’s principal.
When you focus on paying off debts with higher interest rates first, not only will you save money in the long run, you can pay off your other debts with the money you have used to pay off the first debt—speeding up the amount of time it will take to pay off all your debts over time.
The term “avalanche” comes from comparing this method of repayment to an avalanche. In that, it will start off slow but pick up speed as time goes on. Moving very quickly at the end. Similar to how an avalanche moves!
This is How the Debt Avalanche Works
Let’s break this debt repayment system down. Much like the Debt Snowball Method, you can organize your strategy in four pretty simple steps. Keep in mind that this can seem overwhelming, especially if you have a lot to repay, but starting is the only way to pay those debts.
Step 1: Create a debt inventory
This first step is a big one, especially if you haven’t actively tracked your debts; just mindlessly make your minimum payments. You may be shocked by the amount that you owe.
Gather up all your debts. Be it credit cards, loans, student loans, rent-to-own, medical bills, all of them. You will be doing yourself a disservice by leaving any out.
While you are looking at your bill statements, be sure to include the interest rate for each debt. Now it’s time to make your list. Organize your list from the highest interest rate down to the lowest interest rate. This would be an excellent time to reach out to the lenders of your cards and loans to ensure you have an open payment plan. You don’t want to be penalized for paying your debt off too quickly- yes, that’s a thing.
Step 2: Make all the minimum payments
You have your debt set up from the highest interest rate to the lowest. Alongside each debt, write down what the minimum payment is for that particular debt. That is how much you must pay on that debt while you are paying down the highest interest rate debt. Keep all your payments current.
If you don’t have a budget already, this would be the ideal time to work out a budget. You may find that you cannot treat yourself as often while you’re paying your debt down, but you will eventually be debt-free. Make sure you include the sum amount of all your minimum payments in your budget.
Step 3: Make it your mission to put as much money as possible on highest interest rate
The great thing about the Debt Avalanche Method is that you are paying the extra money onto the debt’s principal and not additional interest it has occurred. Using any extra money you have on your debt will help to pay it off that much quicker.
You may have to sacrifice in other areas to come up with extra money. I don’t mean essentials. You still need to pay rent/mortgage; you still need to eat and have utilities. I mean, if you have three online streaming subscriptions, I’m sure you will survive sacrificing one or even two!
Everyone is different, but I’m sure there are areas in your finances you can tighten up. Again, this is not forever! The debts will get paid off, and you will end up having more money than when you started.
Step 4: cross off the debt and move onto the next
Once you have paid off the highest interest rate debt on your list, pat yourself on the back, and put a big line through it and bid farewell. Now it’s time to move onto your next highest interest rate debt.
Depending on how big the debt is and how much extra money you can funnel into the additional payments, this victorious moment may come quickly or take some time. Despite how long it took, you did it, and you should be proud.
Much like the Debt Snowball Method, you will apply the minimum payment from the debt you just paid off and apply it to the next debt along with any extra money you have. Until one day, you make your last payment on your last debt.
Is the Debt Avalanche a Good Idea?
As you can see, the Debt Avalanche Method is highly effective. This method tends to be the fastest and it saves you the most in interest payments! If you are the kind of person that enjoys tracking these kinds of things on a regular basis, then chances are you will be able to understand how this method is saving you money.
I really like this option for more “set it and forget it” planning. There isn’t really much excitement in this method since you are tackling the largest debts and highest interest rates first. This can make progress feel really slow at the beginning but as you get closer to paying things off you may feel more motivated to do a lump sum.
Overall, the Debt Avalanche Method is a solid choice for paying down your debts! As long as you get started and keep going, any method you choose will have an overall benefit for you!
Debt Snowball vs. Debt Avalanche Methods: Which one wins?
Like many things in life, there is no clear-cut winner. The Debt Snowball vs. Debt Avalanche answer really comes down to your personal preferences.
I think that for most people who are new to paying down debt, the Debt Snowball Method would win out. For those of us that are more into personal finance, seeing the interest savings the Debt Avalanche provides during your spreadsheet day may be more than enough to keep you excited.
Personally, I like to mix these methods together! Since most of my debt is student loans, I like to pay more than my monthly amount and let the extra be spread across all of my loans. I usually try to stagger this amount so the higher interest rates and biggest loans get a little extra pay down.
Then, once my smaller loans get to a more reasonable range, I like to pay them off in one big go by reallocating the extra money I had been paying towards the others! Usually, this happens once a loan gets to the $500 to $1,000 range.
Debt Snowball vs. Debt Avalanche Calculator
To wrap things up, I wanted to share this excellent calculator that will help you compare the Debt Snowball vs. Debt Avalanche Method so that you can decide what works best for you.
This Debt Snowball vs. Debt Avalanche calculator was created by Magnify Money, which is a part of LendingTree. In the picture, you can see an example of what their tool looks like using example numbers!
By inputting some variables such as how many cards (or loans), the APR, and minimum payments, this debt calculator will be able to show you how long it will take you to pay things back using these methods.
I hope that these lessons and tools can help you make a decision that helps you get out of debt faster!
What is your answer to the Debt Snowball vs. Debt Avalanche question? Do you have another method for paying down debt? I’d love to hear from you below!
Kathryn Rucker is a sales consultant and content writer. With 7+ years of sales experience, she is passionate about helping businesses and individuals grow their sales pipelines by improving their online presence.
Disclosures and Disclaimers: The above references an opinion and is for entertainment purposes only. It is not intended to be investment or insurance advice. Seek a duly licensed professional for your financial planning. Bear in mind that some of the links in this post are ads/affiliate links and if you go through them to make a purchase I will earn a commission (thanks!). Keep in mind that I link these companies and their products because of their quality and not because of the commission I receive from your purchases. The decision is yours, and whether or not you decide to buy something is completely up to you.