Want to Destroy Your Debt? Here’s Why an Avalanche is Better Than a Snowball.

If you want to build wealth, you have to be able to control your debt and maximize cash flow. And while I’m not of the mindset that all debt is bad, the truth is that many types are. If debt is holding you back from achieving your financial goals, it’s time to come up with a plan! Today we’re digging into two of the most popular debt pay down strategies: the debt avalanche and debt snowball methods.

To be clear, any strategy in which you are making extra payments to eliminate unwanted debt is a good strategy!

There are pros and cons to both of these methods, as well as adamant fans on either side of the debate. However, in most cases (as in nature) an avalanche will destroy your debt faster than a snowball. Let’s take a look…

What is the debt snowball payoff method?

The debt snowball payoff method is one in which you pay off your smallest debt obligation first. Once that balance is gone, you roll the monthly payment into your next smallest balance, and so on. With each extinguished debt balance, the amount of money you can contribute toward your other balances continues to grow, much like a snowball rolling down a big hill.

The primary benefit of the snowball payoff method is that it can keep you motivated on your debt payoff journey, as you can more quickly knock off individual debt obligations.  Just like at the start of a weight loss program, sometimes seeing a little progress is all we need to really commit to a journey.  

What is the debt avalanche payoff method?

The debt avalanche strategy focuses on paying down your debt obligations with the highest interest rates first, regardless of the size of debt.  The reason for this is that the true “cost” of debt is the interest you owe on that obligation. By paying down balances with the highest interest rates first, you’ll reduce your interest payments faster than under the debt snowball method.

The primary benefit of the debt avalanche payoff method is that it lowers your overall interest cost and will typically result in a faster debt payoff. 

Which debt payoff method is better: the avalanche or the snowball?

Avalanches are more destructive than snowballs.  

From a purely mathematical perspective, the debt avalanche payoff method will beat out the snowball method in most cases.  

How much better is it? That depends on your individual debt portfolio – specifically your outstanding debt balances, their respective interest rates, and your ability to make extra payments.

For example, someone who has a large credit card balance with a high interest rate (20% – 30%), along with some smaller loans which have low rates (0% – 5%), will see a much bigger benefit than someone who has debt balances with very similar interest rates. And if the interest rates for your debt are all the same, then you should in fact default to the snowball method.

Of course, psychological factors also play a part in our debt paydown journey, which is why some people ultimately prefer the debt snowball method.  Because of this, it’s important to understand how each method works and how the numbers work out in your personal scenario, so you can make an informed and rational decision. 

Either way, I strongly encourage you to do the math before committing to that strategy.

But I thought we weren’t supposed to make financial decisions just based on the “math”?  

Although that’s usually my stance, in this case, it’s better to follow the math.

You can “math up” most financial decisions; however, these equations usually require using one or more assumptions.  As such, the best option isn’t always clear based on math alone. 

One such example is the debate around whether to pay down your mortgage or invest excess cash.  

Although many folks in the personal finance community will argue that you shouldn’t pay down the mortgage if your interest rate is low, the expected market returns they are referring to are complete estimates.  The “math” in this case is really just an educated guess.  The results could actually go either way.  Additionally, in that scenario, you’re trading a liquid asset (cash) for an illiquid one (home equity), so it isn’t only a math question.

When we’re dealing with debt paydown; however, the math is FACT.  Unless you have variable rate debt, there aren’t any unknown assumptions mucking up the equation.  The math is based on known data – debt balances, interest rate, and cash available to pay.  

My point being that before you commit to the snowball method, you should review the math to see if and by how much better the debt avalanche method would be in your situation.  It could be that the difference isn’t much. In that case, you should choose whichever debt paydown strategy feels best to you.  But what if there’s a significant difference? Than, perhaps you should more strongly consider the debt avalanche strategy or a hybrid approach that reduces the impact.  And to be clear, under certain debt structures, the snowball method could actually be better.

Sometimes just seeing how much money you save with each $100 or $1,000 paid under one approach vs. the other can be enough to motivate you. 

Let’s look at an example!

I like nerdy math, so let’s consider an example using this hypothetical debt portfolio.

Now, let’s see how our debt payoff journey would look under both the debt avalanche and debt snowball methods. 

Assumptions

For simplicity purposes, I set the minimum monthly payments at the starting interest amount for each debt instrument, as shown below.  

We will pay the required minimums for every debt balance under both strategies so the debt doesn’t go into default.

Let’s also assume that we have an additional $300 per month that we can put towards our debt balances.

As you pay down debt, certain required monthly payments decrease, while others remain fixed until the entire balance is paid. The best example of the former are credit cards, since the required monthly payment (and interest) are based on current outstanding balances. As that balance goes down, so do the required payments, freeing up more cash to go towards our debt obligations.

Mortgages, student loans, and auto loans are all examples of fixed-payment loans, where the monthly payment remains constant until the entire loan is paid off.  Making additional payments on these loans is still beneficial, since it lowers the portion of each payment that goes towards interest, but there is no additional cash flow until the debt is gone.  I’ve followed this same logic in our example.

So, the question we’re trying to answer is where should we put that extra $300, and any additional cash flow we free up along the way?

The results

Unsurprisingly, the results show that using the debt avalanche method is the fastest way to pay down debt in this scenario.

Debt avalanche method: After 3 years of payments, we will have paid off both credit cards and started paying down our student loans.  Total outstanding debt would be $34,221, with our monthly interest payment reduced to $156 per month.

Snowball method: After 3 years of payments we will have paid off credit card #2 and our low interest car loan instead, and just started paying down credit card #1.  Under this method, we’d have $37,321 in debt remaining and a much higher monthly interest payment of $303.

Why such a large difference after only 3 years?  Because putting money towards high interest debt will yield greater savings than putting it towards lower rate debt.  

For example, making an extra $5,000 payment towards our highest interest rate loan (credit card #1 at 25%) would eliminate $1,250 in annual interest.  That same $5,000 when used against our lowest rate loan (Auto loan at 3%) would only eliminate $150 of annual interest. 

By the end of our debt repayment journey, the debt avalanche method would result in paying off our debt 8 months sooner and saving us almost $6,000 in interest payments!  

That’s huge, especially when you remember that were putting the same amount of money towards debt in both scenarios.  In a real world scenario, where minimum debt payments included more than just $1 per month, these pay off dates would be shorter under either method, but the difference is clear.  

Don’t worry, there is an “easy button”

There are several online calculators which make this comparison fast and easy, which is why I recommend you do the math and consider the results before picking a strategy.  Just enter your exact payments, balances, interest rates and extra cash and click a button to compare methods.

I compared my results to a few different online debt payoff calculators and liked Nerd Wallet’s the best.   Some website’s calculators incorrectly calculated my results under the debt avalanche method, as they failed to differentiate between fixed loan debt and variable/credit card debt.  So it’s important to compare results if the outcome doesn’t align with your expectations.

There’s no one right way to get out of debt!

Just like there’s no one right way to FI/RE, there isn’t only one right way to pay down debt.  Several different debt paydown strategies and ways to implement such strategies exist.  The debt avalanche and debt snowball methods are just the most well-known and popular of these strategies. 

Despite the math presented above, you may still prefer the snowball method, and that’s ok.  In certain circumstances, there won’t be much of a difference between the two strategies, such as when interest rates don’t differ much and/or you only have fixed payment loans. However, in many cases, like the example above, the difference can be pretty substantial. 

If you struggle with the psychology of making financial decisions, you may want to consider debt consolidation or a hybrid approach.

Debt consolidation could help to lower your rate and give you one single balance to focus on.

If that’s not possible, a hybrid approach which might work for you would be knocking out your smallest loan or two quickly to get that initial motivation boost before switching to the avalanche approach. This strategy might produce just enough in visible results to get you committed to the journey, without a huge financial impact.

Only you can determine which debt paydown strategy will work best for your situation.  The most important thing is that you create a plan and keep making progress towards paying off your debt and taking back control over your finances. 

How are you paying down your debt?

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