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Snowball vs. avalanche: Two methods to pay off debt

In a society based on consumerism, there will usually be debt. That’s certainly true in the United States, where total household debt rose to an average of more than $17 trillion in the third quarter of 2023.

Because there’s more than one type of consumer debt—credit card, mortgages, auto loans and student loans, just to name a few—there are more ways for you to get into debt. But too often, when you’ve got more money going to pay off your balances than landing in your savings account, you’re left trying to figure out how to get out of debt.

But…isn’t the idea of financing your debts to make your payments more manageable? Well, yes, but paying off debts as soon as possible instead of spreading them out over time is a good strategy for a number of reasons, as you’ll:

  1. Save on interest. The longer you carry debt—especially high-interest debt like credit card balances—the more interest you pay. Paying your debt off more quickly can significantly reduce the total amount of interest you pay out.

  2. Improve your credit score. High levels of debt can negatively impact your credit score. Reducing debt can improve your credit score, which is beneficial for future borrowing needs, like a mortgage or car loan.

  3. Enjoy more financial freedom. The money spent on debt payments could otherwise be used for savings, investing for retirement, building an emergency fund, or personal or family needs.

  4. Avoid the debt trap and other negative consequences. Making minimum payments can lead to a situation where you’re mostly paying off interest without making much progress on the principal. This can trap you in a cycle of debt and lead to defaults that can damage your credit score and financial reputation.

  5. Reduce financial stress. Debt can be a significant source of stress and anxiety. Eliminating or reducing debt can lead to greater peace of mind and a sense of financial security.

Paying off debt can also help you gain financial discipline and encourage better budgeting, spending habits and an overall more responsible approach to managing finances.

So, where do you start?

There are two popular strategies for paying off debt: the snowball method and the avalanche method. They differ in their approach to prioritizing debt, but both methods are effective, and you can choose based on your personal preference and financial goals. Let’s take a look:

Method 1: Snowball

Prioritization: Debts are ordered from the smallest to the largest balance, regardless of interest rates.

Motivation: The focus is on psychological wins. By paying off smaller debts first, you experience quicker successes, which can motivate you to keep going.

Process:

  1. You make minimum payments on all your debts except the smallest.

  2. Any extra money is put toward the smallest debt until it’s paid off.

  3. Once the smallest debt is paid, you roll the amount you were paying on that debt into the next smallest debt, creating a “snowball effect.”

Interest consideration: Less emphasis on the interest rates; you may end up paying more in interest over time compared to the avalanche method.

Method 2: Avalanche

Prioritization: Debts are ordered from the highest to lowest interest rate, regardless of the balance. 

Cost efficiency: The focus is on saving money on interest payments. By paying off your high-interest debts first, you reduce the total interest paid over time. 

Process:

  1. You make minimum payments on all your debts except the one with the highest interest rate.

  2. Any extra money is put toward the debt with the highest interest rate until it’s paid off.

  3. Once that debt is paid, you roll the amount you were paying on that debt into the debt with the next highest interest rate.

Psychological aspect: Requires more discipline and patience; it may take longer to pay off the first debt, especially if it’s a large balance.

Snowball vs. avalanche: Key differences

Focus: Snowball focuses on quick psychological wins and simplifying the number of debts. Avalanche focuses on reducing the overall interest paid.

Interest rates vs. balance size: Snowball ignores interest rates in favor of paying smaller balances first, while avalanche prioritizes high interest rates, whatever the balance.

Long-term cost: Avalanche typically results in lower total interest paid. Snowball, however, can offer more immediate gratification and motivation.

Conclusion

In choosing between the two methods, think about what motivates you more: The quick wins of paying off small balances with the snowball method, or the more logical approach of saving on high-interest payments with the avalanche method. Both methods are effective, and which one you choose depends on your personal preference, financial goals and individual circumstances.

Just keep in mind that while paying off debt as quickly as possible has a lot of advantages, it’s also important to consider your overall financial situation. This includes having an emergency fund in place to help you avoid going back into debt as a result of unexpected expenses, and balancing debt repayment with other financial goals and commitments.

It’s time to take your first step into a debt-free future—and we know you’ve got this!