Debt Avalanche vs Debt Snowball

Perhaps it was fun getting into debt (i.e. going out with friends, traveling, etc). Perhaps life threw you a curveball that you were not expecting. However it happened, you are now faced with the aftermath. You need to dig yourself out of that hole.

The good news is it can be accomplished. The bad news is it’s going to suck.

You may hear the terms “debt snowball method” and “debt avalanche method” thrown around. Is one really better than the other? Let’s talk about the difference between the two and take a look at the real math.

Debt Snowball Method

Simply put, there are three aspects to this method. 1) you pay the minimum on all your debts. 2) once you have paid off one debt, take that money and apply it to the debt with the next lowest balance. 3) if you have any extra money to put toward your debt, put it toward the debt with the lowest balance.

For example, you have $2,000 to use toward debt each month. Your minimum payment for all debts is $1,500. That means that the $500 difference will ALL be used toward your debt with the lowest balance until it is paid off.

Debt Avalanche Method

Again, simply stated, there are three aspects. 1) you pay the minimum on all your debts (just like the snowball method). 2) once you have paid off one debt, take that money and apply it to the debt with the next highest interest rate. 3) throw any extra money toward your debt with the highest interest rate.

For example, you have $2,000 to use toward debt each month. Your minimum payment for all debts is $1,500. That means that the $500 difference will ALL be used toward your debt with the highest interest rate until it is paid off.

Is One Really Better Than the Other?

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Let’s take a look at a fictitious scenario. Here, this person has six debts to pay off. The payoff time in the last column assumes that neither the snowball nor the avalanche method is used. That is just the time it will take to pay off the debts making the payments listed.

The above debts total $1,500 in payments each month. Now, folks, here’s the real math using the avalanche method on the left side and the snowball method on the right side: 

As you can see, there is not a significant between the payoff times if the person pays the lowest balance first or the highest interest rate first! The top numbers ($1,910.44 and $1,909.05) are the amount saved in each scenario. Paying off the debt with highest interest rate first saves you $1,910.44, and paying off the debt with the lowest balance first saves you $1,909.05. Not a significant savings difference. Folks! I have been saying this as loud as I can for as long as I can, and it always falls on deaf ears!

Adding Extra Payments

What if this person had $2,000 per month to put toward debt? How would that change the above payoff time and the amount saved? Let’s take a look at the numbers:

Again, not a significant difference in your savings or your payoff time using either the snowball or avalanche method.  Paying your highest interest debt first saves you $6,534.63 and paying your lowest balance first saves you $6,501.38 in interest payments. However, throwing an extra $500 a month toward your debt (which means you are now paying $2,000 a month for debt instead of $1,500 a month) cuts your payoff time by about a third!

I cannot emphasize enough how much you will be saving if you throw extra toward your debts each month! Seriously! Take a look at that difference in savings! That’s the difference between saving $1,900 and saving $6,500! What could you do with that much extra?

Conclusion

It’s a mind game. And it’s up to you. Those are the two conclusions. Whichever method you choose, it’s all in your mind. Some prefer to pay the lowest balance first because it is motivating to pay off debts. Some prefer to pay the highest balance first because they perceive themselves as saving money. Whatever mindset you need to pay off your debts, the important thing is that you are paying off your debts! Have your goals in mind, and let that motivate you!

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