Getting Out of Debt: The Snowball Method vs The Avalanche Method

If you’re struggling with getting out of debt, it can be difficult to figure out the best option for digging your way out of the hole. Two of the most popular methods for paying back money owed to multiple accounts are the Snowball Method and the Avalanche Method. Both have their own distinct advantages and disadvantages, and the key to finding out which one is better for you is by understanding the strengths and weaknesses of each.

Snowballing:

What is it?

The snowball method is most famously advocated for by Dave Ramsey and his many supporters. Using this method, you choose to pay off your smallest debt as quickly as is humanly possible by throwing all the money you can spare at it, all the while maintaining the minimum payments on your other debts. Once you’ve paid off your smallest debt, you move onto the next one, continuing to throw as much money as you can at it. Eventually you work your way up the scale until you have only your biggest debt left to tackle.

Pros and Cons

While you do get the psychological satisfaction of seeing your debts shrinking in front of your eyes and developing good bill-paying habits, the snowball method can be terribly counter productive.

What if your largest debt is also the one with the highest interest rate? While you’re busying pay off your smaller bills, the interest is rapidly accruing, meaning it will not only take you longer to pay off your debts as a whole, but you’ll end up owing far more money in interest than you would had you paid more than the minimum payments.

However, if you’re one of the lucky ones whose smallest debt is also the one with the highest interest rate, then the snowball method is highly motivating and gives you tangible results much faster.

Avalanche:

What is it?

The avalanche method is similar to the snowball method, but it works in reverse. Instead of ranking your debts from lowest to highest and paying them off in that order, you list by interest rate. Just like with the snowballing method, you make the minimum payment each month for all of your debts except the one with the highest interest rate. For that debt, you throw any extra money you have at it until you’ve paid it off. You keep moving down the list until you’ve got all of your debts taken care of.

Pros and Cons 

The avalanche method is not as fast as the snowball method in terms of seeing rapid results, but it absolutely saves you more money long term as you significantly cut down on interest.

You get to feel better about not throwing your money away, and you also become entirely debt free sooner because you’re not suffocating under the rapidly climbing interest accruing on your other payments.

Which One is Right for Me?

The short answer is that it depends entirely on your finances, your comfort level, and your debts owed.

Let’s say Person A has three debts (a car loan, a student loan, and a credit card). The student loan is the highest amount of debt owed, but has the lowest interest rate. Meanwhile, the credit card has the lowest money owed but the highest interest rate. In this scenario, both the snowball method or avalanche method would word as you’re taking care of both the lowest payment and the highest interest rate simultaneously.

Person B also has three debts (a mortgage, a credit card, and a line of credit). They owe the least on their line of credit, and the most on their credit card (which also has the highest interest rate). In this case, choosing the snowball method would mean that Interest on the credit card debt would accrue at an astronomical rate as it’s last on the list to be paid off. The avalanche method would definitely suit Person B’s finances (and peace of mind) considerably better.

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