Debt strategists across America are remarkably divided on the best way to pay off debt. They both claim their side is the correct side: the one that works and makes the difference between financial success and financial failure. They scream “snowball” or “avalanche” as the end-all means of managing debt — as if no other plan will work.
Surprisingly, thousands of Americans have become debt free using the snowball method and thousands of Americans have become debt free using the avalanche method. Why then, all the acrimony?
The avalanche camp claims mathematical superiority. Followed religiously, their plan results in the fewest dollars spent on interest during your repayment period. Seems like a pretty big win.
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The snowball camp claims effectiveness. Personal finance exists in a behavioral realm; snowball debtors are more likely to stick to their debt repayment plan. And only the plan followed to fruition is effective.
Fascinatingly, both camps are right. Their plans each do have a relative superiority to the other.
We could actually rephrase that and say that both plans have relative weaknesses. You may be thinking: There has got to be a better way! There is. The best way to pay off debt is a strategy that utilizes the advantages of each method, avoiding the weaknesses of the other. The best way to pay off debt is to clean up and then clear out.
Let’s begin by looking at the details of the two major plans. That way we can decide what works for us and what doesn’t. In both plans, you make minimum payments on all debts except one. Which one gets all the additional attention is the difference.
The Snowball Method
The snowball method has you pay your debts in order from smallest to largest. No consideration is given to interest rates. Anytime we’re giving no consideration to something financially important, there’s a potential problem.
What the snowball method does well is it gives you some wins up front. You set out to accomplish debt reduction, and you have real-time proof that it is working. You have fewer debts.
This is touted by the snowball’s proponents as its main advantage. In our world, where behavior is everything, the snowball method has a greater chance of being followed through to the end due to its positive reinforcement at the beginning. That advantage is significant and real.
There’s a little more at play here than just the small wins. If you have eight or nine consumer debts and four of them can be paid off quickly, you’ll quickly have only four or five left. You’ve cut the number of debts you have in half. Perhaps in some cases, you’ve cut that number by a third. In others, it will be over half. The normal debt situation will see a reduction in number of debts by about 50 percent early in your debt repayment program.
Mentally — or any other way — this isn’t merely a small win. This is a huge win. It hits you in the face every time you sit down to look at where you are. You have fewer debts. Yeah for you!
Unfortunately, after this initial surge, the method doesn’t serve its users very well. Let’s say you’ve paid off your small debts and have three debts left. They look something like this:
Example 1
| Account | Balance | Interest Rate |
| Auto Loan | $10,200 | 4.9% |
| Credit Card #1 | $18,949 | 9.9% |
| Credit Card #2 | $19,414 | 24.9% |
Clearly you should tackle the highest interest of your remaining debts first. The snowball method is telling you to keep working on them in reverse size order, smallest to largest. The snowball method will hurt you here.
The Avalanche Method
The avalanche method has you pay the debt with the highest interest rate first, then move on to the next, and so on until all debt is paid.
When its proponents claim technical or mathematical superiority, they’re correct. If people were automatons there’d be no need for further analysis: The avalanche method would win. Automatons, however, don’t have debt problems. This leaves a small pool that this method works well with.
It wasn’t stick-to-itiveness that got people here. It wasn’t their overwhelming discipline and force of habit. Those are not the seeds of a debt problem. Any nonhuman entities with debt problems will be well served by the avalanche approach.
When people give advice to follow the avalanche method, it isn’t bad advice. It’s very good advice. It’s good advice, but it has a very high rate of failure. It doesn’t fail because of the approach. It fails because we’re humans.
Often you’ll be presented a scenario like Example 1 above, and this will be used to illustrate the avalanche approach’s superiority.
I spent many years as a financial advisor, and a good number of those training and developing financial advisors. I have seen thousands of debt scenarios. They don’t look like that. That is debt that is already partially cleaned up. Real debt looks a lot more like this:
Example 2
| Account | Balance | Interest Rate |
| Auto Loan | $10,200 | 4.9% |
| Credit Card #1 | $18,949 | 9.9% |
| Card Card #2 | $19,414 | 24.9% |
| Credit Card #3 | $818 | 14.9% |
| Store Charge #1 | #3,818 | 22.9% |
| Store Charge #2 | $236 | 19.9% |
| Doctor Bill | $54 | N/A |
| Medical | $313 | 9.9% |
Now the downfall of the avalanche method should be easier to see. These — very typical — people have a number of debts. Some of them are little nuisance debts that are just lingering around. That doctor bill may be a few years old, but they’re still getting notices on it.
The avalanche method tells them to make minimum payments on everything except Credit Card #2, which is the debt with the highest interest rate. Remember, this, technically, is very good advice.
The problem, practically, is that it is going to take a long time — years — to pay off that debts.
There are no wins; there’s no progress. Remember, it wasn’t stick-to-itiveness that got us here. The avalanche method is fantastic advice with a low probability of success due to humans being human. Automatons don’t have debt problems; humans do.
It’s not that the avalanche method never works. There are tens of thousands of success stories out there. It works very well in two cases.
If your debt looks like Example 1, you should implement the avalanche method immediately. The other case in which it works is when people have a profound internal change that makes paying off debt their number-one life priority. They somehow find a boatload of stick-to-itiveness they didn’t have before.
But for most people with a diverse range of debts, the great advice of the avalanche method will be but a memory before the end of the next quarter. It doesn’t work for the people who need it most.
Clean Up, Then Clear Out
The “clean up, then clear out” method combines the best from both worlds.
We need to take care of those nuisance debts so we can see what is really causing us trouble. We need to start with a snowball approach to cleaning up little things. We need the win of paying off some debts, and we need the huge win of having a smaller number of debts to pay.
And we also need to know when to stop. We need to know when we have cleaned up enough that we should be really paying attention to interest rates. And this needs to be fairly simple.
If the next smallest debt will take you six months or fewer to pay off (if you make minimum payments on all other debts and allocate all available resources toward this debt), then you should focus on this debt next. You can use this criterion right from the start.
In Example 2 above, the smallest debt is the $54 doctor bill. If you can pay this off in 6 months or fewer, you should pay this first.
Good, you’re winning already. Next up is the $236 Store Charge #2. If you can pay this off in 6 months or fewer, this is next.
Once you have cleaned up those debts that you can pay in 6 months or fewer, you should switch your efforts to clearing out the highest interest rate debt that remains.
When that switch occurs will be different for different people. For some people it might be with six debts remaining; for others, four debts remaining. The key is to have a criterion that you have determined in advance and allows you to clean up the little debts so that you only have major debts left to deal with.
Once the 6-months-or-fewer debts are cleaned up, you should clear out the remainder working from the highest interest rate to the smallest interest rate.
Some Practical Considerations in Finding the Best Way to Pay Off Debt
Any time you consider a structured program, you need to step back and look at where you might run into difficulties. No program can address every situation. There are two things you should be very careful of when structuring debt payoff.
Beware of loans against retirement plans. These have more danger than people realize. It’s not just that you’re putting your future at risk — all debt does that.
If you suddenly become separated from your employment, your retirement plan loan can become a big problem. Generally, you need to pay off these loans within a short period of time after separation from service or they’re treated as a distribution. In most cases that means both tax and penalty.
In most cases that’s a big financial problem. If you have a 401(k) loan or other retirement plan debt, consider paying this off early in your debt repayment plan. It doesn’t fit in with any of the above plans as a special consideration, but it needs to be one because it has a lot more risk than other debt.
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Also be careful of tax considerations in determining which debt to pay next. A small mortgage may have a higher interest rate than another debt yet actually cost you less after tax considerations. Always look at the net cost of the debt, not just the face cost.
Final Thoughts on the Best Way to Pay Off Debt
Any debt plan can work if you follow it through to its conclusion. You could attack them alphabetically if that’s what motivates you.
For most people there’s a clear indication of what works. People stick with plans when they can see results. A greater percentage of people will see a snowball plan through to completion than would do so with an avalanche plan.
But a “clean up and clear out” plan allows you to have the necessary wins up front and more importantly gets rid of the little nuisance debts that are clogging up your budget. This plan gives you the wins of the snowball with most of the interest benefits of the avalanche. This debt payoff plan allows you to win on both levels.
