Snowball & Avalanche Debt Paydown Methods

Roshan Pourghasemi

Paying off your debt is no easy task, especially if you have no strategy in place. With the average american owing $96,371 in debt, it’s safe to say that America is in a debt crisis, and, if you want to become financially free, understanding some of the popular debt paydown strategies is a great way to start eliminating your debt.

The Avalanche and Snowball Debt Paydown Methods

Both of the avalanche and snowball methods are accelerated debt repayment plans. While they have some similarities, they also have noteworthy differences, and understanding them will help you evaluate which strategy best suits your needs.

The debt avalanche method is a strategy in which you pay off your highest interest rate debts first. As with most things in personal finance, your first step is to create a budget. In this instance, make sure to know how much of your monthly income you can allocate towards repayment. Then, you list out all your debts, their minimum payments, their remaining balances, and their interest rates. According to the avalanche method, after paying each loan’s monthly payment, the rest of the money you’ve allocated towards paying off debt should be put towards the debt with the highest interest rate. Once you’ve completely paid off that debt, start the method again with the next highest debt and continue until you’ve paid off your debts.

The debt snowball method starts with the same steps of creating your budget, listing out your debts, their minimum payments, their remaining balances, and paying off their minimums. In the debt snowball, however, you put the remaining money you’ve allocated toward debt repayment into the debt with the smallest outstanding balance. In the debt avalanche, you pay off your highest interest debt first, while, in the debt snowball, you pay off your smallest loans first.

Four Credit Card Example

In order to visualize each of these methods, let’s use an example. Say you have the following credit card debts:

  • Card A with $7,000 outstanding and a 15% APR.

  • Card B with $4,500 outstanding and a 10% APR.

  • Card C with $4,000 outstanding and a 5% APR.

  • Card D with $5,000 outstanding and a 20% APR.

For the sake of simplicity, say each card has a minimum payment of $100, you have allocated $750 a month for debt repayment, and you don’t use the credit cards for any purchases.

Using the debt avalanche method, you would pay $400 (4 x $100) in minimums a month for each card and put the remaining $350 of your budget towards Card D, meaning you’ll put $450 (minimum + remaining budget) towards Card D. Once you’ve paid that card off, you would switch to paying off Card A, since it has the next highest APR.

Using the debt snowball method, you would pay $400 (4 x $100) in minimums a month for each card and put the remaining $350 of your budget towards Card C, meaning you’ll put $450 (minimum + remaining budget) towards Card C. Once you’ve paid that card off, you would switch to paying off Card B, since it has the next lowest balance.

The time to become debt free and total interest paid is summarized in the table below.

You can find the numbers specific to your situation using an online calculator.

As you can see, using a strategy saves you a ton of time and money when compared to just paying the minimum amount every month. Also, you can see that the avalanche method is superior to the snowball method in both time and money. Since you pay off the debts with the highest interest first in the avalanche method, you’ll save more money in the long run. The benefit of the snowball method is most psychological, as you pay off your smaller debts first which can keep you motivated to keep continuing the strategy.

Automate the Method

In order to help yourself stick to the plan, it is best to automate your payments. After you’ve decided how much you can afford to put towards debt repayments, figure out which debts will start off with only the minimum being paid and which debt will get the remaining money. After you’ve figured that out, set an automatic payment for the amounts that will be allocated to each debt, and, once a debt gets paid off, remember to add the amount that was going toward it to the next debt in line.

Sticking to a debt paydown method can be hard at times and requires a lot of discipline. It is important to remember just what you are working towards and the heavy burden that will be lifted off of your shoulders once you complete your goals. In the long run, you will be thanking yourself, and the best time to start is now!

Key Takeaways

  • Using a debt repayment plan will allow you to become debt free much quicker than just paying minimums.

  • Two popular debt repayment plans are the snowball method and the avalanche method.

  • In the snowball method, you pay the minimum amount of all your debts and then put whatever remaining money you’ve allocated toward debt repayment towards the debt with the smallest balance.

  • In the avalanche method, you pay the minimum amount of all your debts and then put whatever remaining money you’ve allocated toward debt repayment towards the debt with the highest interest rate.