Snowball vs. Avalanche: Your Guide To Paying Off Debt

Ready to put a plan in motion to pay off your debt? Paying off your debt helps bring peace of mind about your finances, frees up your debt to income ratio for future investments, and puts more money back in your wallet.

There are two common strategies when it comes to paying off debt efficiently: snowball and avalanche methods. Below, learn more about how these strategies can tackle your debt.

Snowball Method

The goal of the snowball method is to pay your smallest loans off first. The satisfaction that comes with paying off a loan encourages you to keep up your momentum and continue to pay off your debt. Then you take the amount you were paying and apply it to the next smallest loan. Here’s how to implement this strategy:

Step 1: Make a list of your debt, excluding your mortgage. Sort the debt from smallest to largest based on the current balance.

Step 2: Review your budget and determine how much extra money you can dedicate to debt. Any amount helps. It can be an extra $50 or $200 monthly, and the amount may change due to other expenses that occur that month.

Step 3: Pay the minimum amount on each loan or line of credit except for the smallest one. For the smallest debt, pay the minimum balance and add the extra amount determined in Step 2.

Step 4: Pay off the smallest loan. Once you have paid it off, take the extra money you were using to pay it off quicker plus the minimum balance, and roll it into the monthly payment for the next smallest loan.

Step 5: Repeat this process until you are debt free!

Show Me The Math

Let’s say you have the following debt:

Auto Loan = $20,000 @7% APR –> Minimum payment = $500
Credit Card = $1,500 @18% APR –> Minimum payment = $50
Personal Loan = $4,000 @6% APR –> Minimum payment = $100
Student Loan = $10,000 @4% APR –> Minimum payment = $300

Following the snowball method, you would start paying extra toward the credit card. Let’s say you can reasonably afford an extra $200 a month for debt. You would apply the extra to the smallest balance loan, which is the credit card in this example. Each month, until the credit card is paid off, you will plan to pay $250.

Once the credit card is paid off, you will add the $250 to the next smallest loan, which is the personal loan. Then, you will begin paying $350 a month towards your personal loan. The amount you pay towards your debt will grow and grow until all of your debt is paid. With this example, the debt would be paid off in approximately 3 years and 9 months. Without this strategy and making minimum payments, you are tacking on another year of debt.

Avalanche Method

The downside of using the snowball method is the interest. Unless you have a promotional loan, you are accumulating interest each month on your balance. The avalanche method tackles your highest loan debt first so you can save time and money in the future. Once you pay off that loan, you can apply that amount to the next highest interest loan. Here’s how to implement this strategy:

Step 1: Make a list of your debt, excluding your mortgage. Sort the debt from the highest to the lowest interest rate.

Step 3: Pay the minimum amount on each loan or line of credit except for the highest-interest loan. For the loan with the highest interest, pay the minimum balance and add the extra amount determined in Step 2.

Step 4: Pay off the debt with the highest interest. Once you have paid it off, take the extra money you were using to pay it off quicker plus the minimum balance, and roll it into the monthly payment for the next highest interest loan.

Step 5: Repeat this process until you are debt free!

Show Me The Math

Let’s say you have the following debt:

Auto Loan = $20,000 @ 7% APR –> Minimum payment = $500
Credit Card = $1,500 @18% APR –> Minimum payment = $50
Personal Loan = $4,000 @6% APR –> Minimum payment = $100
Student Loan = $10,000 @4% APR–> Minimum payment = $300

Following the avalanche method, you would start paying extra toward the credit card since it has the highest interest. Let’s say you can reasonably afford an extra $200 a month for debt. You would apply the extra money to the highest interest loan, which is the credit card in this example. Each month, until the credit card is paid off, you will plan to pay $250.

Once the credit card is paid off, you will add the $250 to the next loan with the highest interest, which is the auto loan. Then, you will begin paying $750 a month towards your auto loan. The amount you pay towards your debt will grow and grow until all your debt is paid. With this example, the debt would be paid off in approximately 2 years and 8 months.

Choose the strategy that best aligns with your financial goals!