When you’re juggling multiple debts — as most people are — it can be challenging to know where to focus. Fortunately, a debt repayment method lets you deal with one piece of that puzzle at a time. It gives you a precise blueprint for repaying your debt in one of two ways.
The debt snowball method prompts you to pay off small debts quickly and free up money to cover significant debts later. The debt avalanche method prioritizes payoff of high-interest credit, so you knock down the interest you owe and get out of debt fast.
Both strategies are proven to accelerate your path out of debt. So how do they work, and which one is right for you?
Before you start
When you have a plan to get out of debt, it’s exciting! But, before you jump in, take a moment to set yourself up for success. Tackle these three critical steps at the start of your journey:
- Stop adding to your balance. Don’t make any new charges. Plus, commit to paying at least the minimum owed on each account every month. Otherwise, you’ll incur costly penalties and damage your credit score.
- Choose your number carefully. To get out of debt faster, you’ll be putting extra money toward your debt until it’s gone. It can be a lot or just a little. Look at your budget and decide how much extra cash — beyond your minimums — you can use for debt repayment every single month.
- Make a list of all your debts. Grab some paper or open a spreadsheet and list out every non-mortgage debt you have. Consider credit cards, car loans, student loans, personal loans, HELOCs, medical debt, and more. For each account, write a brief description (“Amex card,” “PLUS loan,” etc.), current balance, interest rate, and minimum monthly payment owed.
Debt avalanche
The first method you can choose to pay off debt faster is the debt avalanche:
Take your list of debts and reorder them from highest interest rate to lowest. Every month, you’ll pay the minimum owed on each account. But you’ll also take that extra cash you have on hand and put it toward the account at the top of your list — the one with the highest rate.
Do that month after month until that account’s balance reaches zero. With that debt erased, cross it off your list and focus on the account with the second-highest interest rate. Continue paying your minimums. Only now, you’ll want to take your extra money, plus the money you had been paying toward that first account’s monthly minimums and add it to your second account’s minimum payment.
Repeat this process, whittling down the balance of your second account, your third account, and so on until you’re completely debt-free!
How a debt avalanche works
Let’s take a look at an example of the debt avalanche in action. Suppose you have the following debts:
- Car loan with a $3,000 balance at 7% and a $100 minimum payment
- Student loan with an $8,000 balance at 4.5% and a $400 minimum payment
- Credit card with a $16,000 balance at 18% and a $500 minimum payment
You’re paying $1000 each month just to cover your minimum payments but suppose you can pay an extra $250 every month toward your debt.
Sort your debt list by the interest rate (largest to smallest). You’ll focus your extra debt payments on the credit card first, then the car loan, then the student loan.
Keep paying the minimums on your car loan and student loan. But add your $250 in extra cash to your credit card’s $500 payment each month. When your card’s balance reaches zero, add the extra money (now $750) to your car loan minimum payment each month. When that loan’s balance hits zero, add the extra money (now $850) to your student loan’s minimum payment each month. Pay until that loan goes to zero.
In this example, the debt avalanche saves you $2,605 in interest and gets you out of debt 19 months faster than if you had paid just your minimums.
>> Want to see how your numbers look? Use this debt avalanche calculator to find out.
Debt snowball
Want another choice for getting rid of debt faster? The debt snowball is another popular method. Here’s what you do:
Take your list of debts and order them from the smallest balance to the largest. Every month, you’ll pay the minimum owed on each account. But you’ll also take that extra cash you have on hand and put it toward the account at the top of your list — the one with the smallest balance.
Keep paying each month until that first account’s balance hits zero. Then move on to the second account on your list. Pay that account’s minimum, plus the amount you’d been paying toward account # 1’s minimum, plus your extra cash.
Keep going until account # 2’s balance is gone. Repeat for every account in your list until your debt is entirely erased.
How a debt snowball works
Let’s revisit the scenario we saw in the debt avalanche example above. Remember that you’ll be paying $250 extra each month toward debt, in addition to the $1000 you’re already putting toward your minimums.
Here’s how it plays out with the debt snowball:
Sort your list by account balance (smallest to largest). You’ll focus your extra debt payments on the car loan first, then the student, then the credit card.
Keep paying the minimums on your student loan and credit card. But add your $250 in extra cash to your car loan’s $100 payment each month. When your loan balance reaches zero, add the extra money (now $350) to your student loan minimum payment each month. When that loan’s balance hits zero, add the extra money (now $750) to your credit card’s minimum payment each month. Pay until that balance goes to zero.
In this example, the debt snowball saves you $2,054 in interest and gets you out of debt 18 months faster than if you had paid just your minimums.
>> Want to see how your numbers look? Use this debt snowball calculator to find out.
Debt snowball vs. debt avalanche: Which one is right for you?
Before you choose a debt repayment strategy, it’s essential to understand the pros and cons of each:
Debt avalanche advantages
The debt avalanche has the clear mathematical advantage. High-interest debt costs you more than its low-interest counterpoint. So, by focusing first on high-interest debt, the avalanche minimizes the interest you pay while getting out of debt. At the same time, it ensures you spend as little time as possible in debt.
When you use this method, you’re truly maximizing the power of each of your extra dollars.
Debt avalanche disadvantages
The downside of the avalanche is that it may take a while to get your first big win.
Consider our example. You start the method by chipping away at a $16,000 credit balance. And — while the avalanche will save you time — you won’t get down to zero for 26 months.
Waiting for each milestone on the journey might drain your motivation or even have you throwing in the towel before you’re done.
Debt snowball advantages
That psychological factor is precisely the advantage offered by the debt snowball. It delivers a series of quick wins that keep you motivated to move through the process.
These early successes can be particularly empowering since the journey’s beginning can be tough. You’re still getting used to the additional debt payment in your budget and building the skills and habits you need to finish. Psychological studies show that the debt snowball powerfully motivates people to keep going since they see quick, visible results from their efforts.
Debt snowball disadvantages
While the snowball offers a definite morale boost along the way, it comes at a cost. Compared to the avalanche, you may find yourself paying more in interest and spending more time in debt. And that’s time and money you could have used to pursue your other financial goals.
So which ones is best?
In our example above, choosing the debt avalanche over the debt snowball saves you an extra $551 and one month in debt. But that’s not always the case.
Sometimes, the method you choose makes a big difference timewise and moneywise. In other cases, the disparity is small . . . or the time and cost savings aren’t as important as other considerations.
So how do you choose?
If you’re confident you’ll stick with any debt repayment method, opt for the money-saving avalanche. If you know you’ll need the positive reinforcement the snowball provides, go that route instead.
In the end, there’s no trophy for choosing the fastest way out of debt. The way that works best for you, your personality, and your lifestyle is the best way.
Get out of debt faster
Whatever you choose, both the avalanche and the snowball get you out of debt sooner than if you just paid your minimums. But there are smart steps you can take to elevate your debt payoff game to the next level:
- Look into lowering your interest rates. Negotiate them down, explore the possibility of a balance transfer, look into debt consolidation, or consider a loan refinance.
- Choose your extra payment amount wisely. The more money you can put toward your debt, the faster you’ll get out of debt and the less you’ll pay in interest. (Just keep in mind that the amount you choose should be sustainable over time.)
- Amp up your extra payment amount. Get creative in digging up some extra cash to put toward debt. Find ways to earn more. Or adjust your budget to free up more money you already have.
- Supercharge your debt-free journey with one-off payments. Supplement your avalanche or snowball with “debt snowflakes” — one-time bonus payments you add to your existing strategy. Use money you receive from a commission, tax refund, year-end bonus, garage sale, or office pool win.
- Create accountability (and a rewards system). Share your goals and progress with someone who will keep you honest — maybe a spouse, friend, or online group. And track your progress toward eliminating individual debts. Be sure to reward yourself for each milestone you reach!
- Consider switching methods mid-stream. If you’re feeling solid in your motivation and new habits, go ahead and switch from the snowball to the avalanche. Or, if your morale starts to wane, move from the avalanche to the snowball to grab some quicker wins.
Whether you choose the debt snowball or the debt avalanche, the destination is ultimately the same. Each path will guide you toward better financial health. And, while that journey can sometimes be challenging, the promise of a debt-free life is always rewarding.
