Avalanche vs. Snowball Method: Does it make a Difference?

If you are committed to paying down your debts you must first:

  1. Develop a realistic budget
  2. Decide how long it will take you to pay off the debts
  3. Implement a system that will help you stick to your budget
  4. Recruit an accountability partner to cheer you on
  5.  Decide that the time to get out of debt is now

This post discusses 2 methods to paying down debt by doing it on your own. We’ll also look at benefits & drawbacks of each method.

The Debt Avalanche:

This method requires you to list all your debts from highest to lowest interest rate and make minimum payments on all your debts except the one with the highest interest rate. Any amounts over the minimum payments go towards the highest interest rate debt.

Here is an example:

Name Amount Minimum Payment Years to Payoff (based on min payment) Interest Rate
Credit Card #1

 

$ 4,500 $90

(2% of principal)

9.0 19.99%
Credit Card #2

 

$ 2,300 $46

(2% of principal)

6.5 15.00%
Student Loan #1 $10,500 $143 10 7.00%
Student Loan #2 $5, 200 $57 10 5.5%
Home Equity Line of Credit

 

$22,000 $74

(interest only)

indefinitely 4.0%
Totals $44,500 $410

 

Assume you allocated $600/month towards debt repayment. Using the avalanche method, you would make minimum payments towards all the debts except Credit Card #1, which you will put $280 instead of $90/month. Once this debt is paid off you would move on to Credit Card #2 until the last debt is paid in full.

Using the avalanche method and with the assumption of starting the debt journey this month (August 2016) at $600/month, all debts will be repaid by January 2024, broken down as:

Type of Debt Paid off by Principal Amount Interest Paid Total Cost of Debt
Credit Card #1 Feb 2018 $ 4,500 $ 781.70 $5,281.70
Credit Card #2 Aug 2018 $ 2,300 $ 589.40 $2,889.40
Student Loan #1 March 2020 $10,500 $1,843.23 $12,343.23
Student Loan #2 Oct 2020 $5, 200 $ 938.47 $6,138.47
HELOC Jan 2024 $22,000 $5,166.82 $27,166.82
TOTALS JAN 2024 $44,500 $9,319.62 $53,819.62

Based on the first table, if someone had $44,500 of debt and increased from making minimum payments of $410 to $600, they would cut their debt repayment time by 2.5 years; from 10 years to 7.5 years. If they increased their debt repayment amount more, time would be reduced faster.

To do your own avalanche debt repayment schedule, check out this useful calculator here.

The main benefit to the avalanche method is you will spend the least amount paying back interest. By paying off your highest interest rate debt first, your cost of borrowing is reduced; allowing more money to go towards principal.

The biggest drawback to the avalanche method is more ‘personal’ than ‘mathematics’. While saving on interest cost is important when repaying debt, this method does not account for repayment fatigue.

The Debt Snowball:

This method requires the debts be listed from the smallest to largest balance, irrespective of interest rate. Make minimum payments on all debts. Amounts over and above the minimum payments go towards the lowest balance.

Here is the same example:

Name Amount Minimum Payment Years to Payoff (based on min payment) Interest Rate
Credit Card #2

 

$ 2,300 $46

(2% of principal)

6.5 15.00%
Credit Card #1

 

$ 4,500 $90

(2% of principal)

9.0 19.99%
Student Loan #2 $5, 200 $57 10 5.5%
Student Loan #1 $10,500 $143 10 7.00%
Home Equity Line of Credit

 

$22,000 $74

(interest only)

indefinitely 4.0%
Totals $44,500 $410

Using the snowball method and assuming repayment starts in August 2016 @ $600/month, the total debt will be paid by Jan 2024. However, the interest cost will be $288.53 higher than the avalanche method:

Type of Debt Paid off by Principal Amount Interest Paid Total Cost of Debt
Credit Card #2 June 2017 $ 4,500 $168.29 $4,688.29
Credit Card #1 Sept 2018 $ 2,300 $1,371.51 $3,671.51
Student Loan #2 Aug 2019 $10,500 $677.39 $11,177.39
Student Loan #1 Oct 2020 $5, 200 $2,195.46 $7,395.46
HELOC Jan 2024 $22,000 $5,195.50 $27,195.50
TOTALS JAN 2024 $44,500 $9,608.15 $54,128.15

To do your own snowball debt repayment schedule, check out this useful calculator here.

The benefit of the snowball method is that by focusing on the smallest balance, it provides motivation to keep going as you build momentum through each ‘small win’. Its biggest drawback is interest cost is ignored, this may result in paying more interest over the debt repayment period.

BUT DOES IT MAKE A DIFFERENCE WHICH OPTION YOU CHOOSE?

  • Both repayment options end in Jan 2024, reduce repayment time from 10 years to 7.5 years
  • Both repayment options apply minimum payments to all debts at all times ensuring credit scores are not adversely affected
  • The avalanche method saves you $288.53 over 7.5 years compared to the snowball method

So which repayment option should you use?  The one you will stick with to the end!

Here are things to consider before you make a decision on which method to use:

  • Is the order of debt repayment in line with your financial priorities? For example, if you have young children, striving to pay off the HELOC may be less of a priority as it costs you the least each month.
  • Is your debt repayment method in line with tax planning? This is especially true for investment loans where interest expenses can be written off at tax time. Borrowing to invest may affect how you repay your debts.
  • Can I do a combination of these two method? We never actually used either methods in paying off our $120k debt. Rather we used the snowball method for our credit cards which we paid off first. Then switched with the avalanche method for our student loans.

What method are you using to pay off your loans? Do you think the method used makes a difference?

Categories: Debt

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12 replies

  1. There are ways to keep yourself motivated with the avalanche. I think if you concentrate on where you start versus how far you’ve come, and set some milestone mini-rewards (Dinner out after paying off each X amount, Weekend trip after paying off each 4X amount) you can get both the benefits of paying off the higher interest and the validation of paying off debt that the snowball provides.

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    • The mini rewards are a great way to keep the motivation going. When we were paying off our student debts we set aside $150- $200 for a nice night out for every $10,000 we paid off. That money could have gone to debt but if it did we may not have finished the repayment. Mini rewards are great, especially for large amounts of debt. I thinks it is important though not to spend more than 1-3% of what you paid off rewarding yourself, or else the debt might not get paid. Thanks for stopping by.

      Like

  2. I love the detail and the fact you showed how beneficial both can be! I snowballed while ML is doing the avalanche. Like Liz, we’ve been known to swap to keep motivation going.

    Liked by 1 person

  3. I think the method that works best is the one that you stick with. While you do save more doing the avalanche method, some people get motivated by seeing those little wins that using the snowball method provides. I think what’s important is you just get started attacking that debt! Most people are content to just pay their loans back slowly until eternity. We’re just conditioned to make payments all our lives.

    Liked by 1 person

    • You said it well. We are conditioned to make payments. For some time in my life I was okay with making payments. Until I decided to run the numbers on me and my husbands student loans if we just made minimum payments. The numbers shocked me. From then on I have had a new perspective on debt and money. Minimum payments truly do rob wealth from one’s life.

      Liked by 1 person

  4. I do not think it matters. Honestly, I’ve calculated it up a million times and no matter which method we use, the debt-free end dates are nearly always the same, with at most – a month apart. Yes, the Avalanche method always wins out in less interest paid, but again… it’s not by much. Most of our interest rates are very close together, so the interest isn’t a huge reason to choose one or the other.

    I also like to swap back and forth to whatever mood I’m in. If I’m feeling a bit downtrodden, I’ll switch over to the snowball so I can feel that motivation and excitement.

    Overall, my husband and I have been paying ours off in order of what’s best for our credit scores, as we’re trying to boost them so we can get a great interest rate on a mortgage. That means paying credit cards first, despite their interest rates, etc.

    I think as long as someone is making solid progress towards paying their debts down, it doesn’t matter what method is “better.”

    Great post!

    Liked by 1 person

  5. Bless all your effort and time spent creating these incredibly meaningful and beneficial posts. Giving this information to the public shows the type of heart you were born with. Keep up the good work and continue to help people by reaching a successful debt free solution.

    Like

    • Thanks. I can’t take all the credit though. I used a super useful calculator tools that flips between both methods. The point I hope to get across is that who cares what method, just pick one that you will finish and won’t make you give up.

      Like

  6. Great analysis, thanks Pamela! My choice would definitely be the avalanche method as I would be able to get past the repayment fatigue by knowing I was doing it mathematically the best way possible with the lowest interest expense over time.

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    • That’s great. Even though I get the numbers I think I would need a bit of push along the way so I would start with snowball. It would depend though on how high the interest rate was, how much I was making at the time and a few other factors. When I focus on something I an usually pretty good at following through but I like the motivational part of the snowball method.

      Like

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