There are many debt-payoff strategies out there, though the debt snowball and debt avalanche methods are probably among the best-known. But how effective are they? And is any one strategy the best choice?
What Is the Debt Snowball Method?
With this method, you start by eliminating the lowest balances first. You usually choose the debt snowball strategy because you’re new to debt reduction and want quick results so that you stay motivated.
Steps to a Successful Debt Snowball Strategy
First, organize all your bills from lowest balance to highest balance, ignoring the interest rates on the debt.
Once you do that, concentrate on paying off the smallest balance while making the minimum payments on your other debts. For example, if you have three credit card balances of $250, $500, and $1,000, you’ll make the minimum payment for the second and third credit cards and pay down the first card as much you can to bring it to zero balance.
Your aim is to pay double or triple the minimum amount until the smallest balance is fully paid off.
Then, after you’ve completely paid off the smallest balance ($250), deal with completely paying off the second smallest balance ($750) while paying the minimum toward the third debt. Continue this strategy until all of your debts are eliminated.
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What Is the Debt Avalanche Method?
With the debt avalanche method, you target the debt that carries the highest interest. You choose this strategy because you know that you’ll save money and time by eliminating the most costly debt and its compound interest first. In other words, your motivation with this strategy is to save money.
Your strategy is to organize your debt according to interest rates (highest to lowest) without paying attention to the balance. In the event that you have two balances of different amounts with the same interest rate, you prioritize the one with the highest balance.
You make the minimum payments on your lower-interest balances while applying all your extra money to the debt with the highest interest rate.
Debt Snowball vs. Debt Avalanche: Which Is Better?
The term “better” is subjective when it comes to identifying which financial strategy works best for you. If you’re looking for the most logical and cost-effective way to eliminate debt, then your best option is the debt avalanche method, since you tackle your high-interest, high-balance debt first.
However, we all react to money management differently, so it's crucial that we acknowledge the role that emotions play in coping with debt.
If you need quick results to keep you focused, the debt snowball strategy will work best.
My Approach
The debt snowball strategy made emotional sense to me when I was getting out $65,000 of credit card and student loan debt. Tackling the smallest amount kept me motivated.
From a budgeting standpoint, this approach was the least brutal to my monthly budget and gave me enough breathing space. I didn’t feel pressured to find large amounts of money in a short period of time.
Once I grew confident in my ability to pay down my debt, I ditched the snowball and started to own the process of debt payoff. There were times that I would apply payments toward student loan and credit card balances twice a month.
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I would often pay an amount that made the balance a round number. For example, if my student loan balance was $31,943, I would set a goal to make it $31,000 by the next billing cycle.
I wasn't following any system — I just felt good. And it worked! I’ve used this part-system-part-intuition approach in other areas of my finances, including how I save money for my emergency fund or how much I allocate toward my monthly investments.
Can You Use Both the Debt Avalanche and the Debt Snowball Method?
The answer to that is a resounding yes. To develop the necessary discipline, you may begin with the debt snowball method, but later switch to the debt avalanche method to help you save money.
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Don’t waste your time trying to find the perfect way to pay off debt. There’s only what’s right for you, your tolerance for systems, and what you can psychologically and financially manage at any given time.
