Debt snowball vs. debt avalanche

What is the debt snowball method?

The debt snowball method involves paying off your debts in order of outstanding balance, starting with the smallest. The idea is to knock out your small loans quickly, gaining momentum and motivation to keep paying down your debt until you’re debt-free.

For example, let’s say you have the following debt load:

• Visa credit card: $1,500 with a 24% annual percentage rate (APR)
• American Express credit card: $2,500 at 29% APR
• Auto loan: $11,000 at 11% APR
• Personal loan: $2,000 at 10% APR
• Student loan: $19,000 at 5% APR

Now, let’s say you have $1,000 per month to apply toward all of your debts. And for simplicity’s sake, all of your debts have a minimum monthly payment of $50.

Following the debt snowball method, you would first rearrange your debts in order of smallest to largest balance, ignoring each debt’s interest rate. Then, you would start making the largest payment possible on your debt with the smallest balance while making minimum payments on the rest.

Your monthly payments would then look like this:

1. Visa credit card: $800
2. Personal loan: $50
3. Amex credit card: $50
4. Auto loan: $50
5. Student loan: $50

Once the Visa balance is paid off within two months, you roll your new maximum payment into your personal loan:

1. Personal loan: $850
2. Amex credit card: $50
3. Auto loan: $50
4. Student loan: $50

If you follow the debt snowball method, your credit cards and your personal loan will be paid off within a year, and you’ll be well on your way toward repaying the auto loan as well.

This example illustrates why the debt snowball method has become increasingly popular; it allows you to knock out loans quickly, taking a load off your mind and, in theory, providing the motivation to keep budgeting until you’re debt-free.

How to make a debt snowball spreadsheet

Due to the popularity of the debt snowball method, there are plenty of free spreadsheet templates online that you can safely download and use to track your spending.

One of the more helpful spreadsheets we’ve found is from Vertex42. The site has also created a five-minute video tutorial that can help you fill out the spreadsheet and see exactly how your debt snowball would play out.

For a non-spreadsheet option, consider using this debt snowball calculator courtesy of Undebt.it.

How can the debt snowball method help you pay off debt faster?

The debt avalanche method is cheaper and may sometimes be faster than the snowball method. By tackling debts in order of interest, not balance, you’ll end up spending less on interest and possibly even less time in debt overall.

That said, many experts say the best debt-reduction strategy is simply the one that works for you personally. Paying off debt can take years of discipline, and sometimes the method that motivates you may not be the most efficient on paper.

That’s why the debt snowball method has become more popular. It provides psychological benefits over mathematical ones.

Compared with the debt avalanche, the debt snowball offers the following advantages:

• It provides “quick wins” as you rapidly pay off small debts.
• It clears individual debts off your plate faster, giving you less to think about.
• It provides the motivation certain borrowers need to keep going and cross the debt finish line.

If you’re primarily motivated by scoring quick wins and feeling a sense of progress, the debt snowball method may be the right debt-reduction strategy for you.

» MORE: How to manage your money

What is the debt avalanche method?

The debt avalanche method involves paying off your debts in order of highest-to-lowest interest.

By eliminating your highest-interest debt first, you’ll minimize your total interest paid and start working down your principal(s) much faster. Many economists and financial experts say the debt avalanche is the most mathematically efficient method of paying off multiple debts.

Let’s revisit the previous example to see how using the debt avalanche method would work instead of the snowball. Again, we’ll assume you have $1,000 to apply toward your debt load each month, and each outstanding debt has a minimum monthly payment of $50.

Following the debt avalanche method, you’ll arrange your outstanding debts in order of highest to lowest APR and start making the following monthly payments:

1. Amex credit card: $800
2. Visa credit card: $50
3. Auto loan: $50
4. Personal loan: $50
5. Student loan: $50

Once the Amex bill is paid off within four months, you’ll move on to the Visa card balance:

1. Visa credit card: $850
2. Auto loan: $50
3. Personal loan: $50
4. Student loan: $50

Following the debt avalanche method, you’ll wipe out your high-interest credit card debt within six months and start chipping away at your auto loan after that, minimizing your total time and interest paid until you’re debt-free.

How to make a debt avalanche spreadsheet

To set up a debt avalanche spreadsheet, you can use the same Vertex42 template. Just go to the drop-down menu located in cell C23 and set the “strategy” to avalanche. Once you’ve filled in your debt load information, you can alternate between avalanche and snowball to see how each method would play out for your specific numbers.

You can also toggle to debt avalanche using the calculator from Undebt.it.

How can the debt avalanche method help you pay off debt faster?

On paper, the debt avalanche method is cheaper than the snowball. By using the above examples with the Undebt.it calculator, you can see the numbers support the debt avalanche method by a small margin. You’ll become debt-free on the same date using either method, but the avalanche will save you $156 in interest.

The debt avalanche method boasts the following advantages over the debt snowball:

• It is the more mathematically efficient method of paying off debt.
• It can help you save on interest and, in some cases, become debt-free faster.
• It may be better for your credit score because it keeps installment loans open longer.

The debt avalanche method is the better option if you’re more motivated by the most efficient path possible, regardless of when your individual debts are eliminated.

» MORE: Interest rates and how they work

Which is better: the debt snowball or debt avalanche?

“The debt snowball method is best for those who value the psychological benefit of checking off debt balances more quickly,” said Christopher Stroup, a certified financial planner with Abacus Wealth Partners. “The avalanche method, on the other hand, is best for those that value paying the least in interest over the life of their debt repayment plan.”

However, don’t forget that the debt snowball and the debt avalanche are just two strategies of many to become debt-free. If you’d like hands-on assistance from a financial expert, you might consider credit counseling, or you could talk to a lender about debt consolidation products.

» COMPARE: Best credit counseling services

Bottom line

Both the debt snowball and the debt avalanche are popular methods for paying off debt. Deciding which one is better for you should be a consideration of how you prefer to tackle goals. If you like to see quick progress, the snowball method may be more motivating; if you prefer the more practical route, the avalanche will help you pay less in interest overall.

However, keep in mind the two aren’t mutually exclusive. You can start off with a debt avalanche to wipe out your high-interest debt first, then switch to a snowball if you need some quick wins to keep going.