The more effective approach is based on your mindset.
The snowball and avalanche are the two most commonly used methods, but what are they and which is better?
Before I get into that, just know that with money, things come down to a technical (mathematical) answer, as well as an emotional one.
Sometimes, the best mathematical answer is ALSO the better emotional approach, but not always.
When it comes to really understanding your relationship with money, you have to understand both.
The math is the math. The numbers can always point you to what “makes more sense”. But, the reality is that 80% of what we do with money comes down to emotions.
So, it’s also crucial to understand how we can use our emotions to SERVE us when making financial decisions.
Both repayment methods have their pros and cons. But if I am being honest, you really can’t go wrong either way.
Your success is based less on the method and more on your ability to stick with it.
Getting out of debt and reaching financial well-being doesn’t happen in a day. You have to be in it for the long-game.
It never hurts to have a plan of attack, so let’s take a look.
What Is The Debt Avalanche?
The debt avalanche is paying off debts in order of highest to lowest interest rate. It doesn’t matter how much debt you owe on each debt, they are prioritized by interest rate only.
For example, let’s say you have four debts: Car loan at 4% interest, student loan at 5%, a credit card at 20%, and a medical bill at 0%.
Debt list for the Avalanche Method:
With the avalanche method, you attack the Credit Card first, because it has the highest interest rate, while making only the required minimum payment on the other debts. Once that card is paid off, you use that now free cash in your budget to apply to the student loan debt. The cycle continues until you have worked your way down the list of debts.
You attack your debts in this order regardless of the debt balances.
Avalanche Pros and Cons
This method is definitely the superior “mathematical” approach. The reason is because you are theoretically tackling the most expensive debt first, which is the one costing you the most in interest. By doing this, you limit the damage of compounding interest working against you. As far as your money is concerned, that’s great.
The downside to this method is depending on the ranking of the debts, you may get stuck paying a heavy debt early in your elimination efforts. This might risk momentum. Take the above example for instance, the $37,000 student loan is the second debt to attack based on interest rate. It’s however the biggest balance and will likely take you the longest. This can pose a challenge when trying to stay motivated and committed to the journey.
Avalanche is great for you if:
- Numbers/math drive your decisions, and you exercise lots of patience.
What Is The Debt Snowball
In the debt snowball approach, you would organize the debts by smallest to largest balance, regardless of interest rate.
Similar concept of throwing as much money as possible at the priority debt, the priority in this case is defined by lowest balance. You continue making the minimum payment on the other debts until the lowest balance debt is paid off.
Debt list for the Snowball Method:
|Credit Card 1||$4,000||20%|
You can see that for the snowball, the medical bill with 0% is now the priority debt. The biggest debt (student loan) is now last.
Snowball Pros and Cons
The snowball is actually my preferred way to get out of debt, and for good reasons.
What I love about this method is that it can get you out of debt the quickest. In many cases, your smallest debt may be less than a grand, so you can knock that one out within a couple of months.
It also provides you quick wins, which is great-psychologically. Seeing a few minor debts get knocked off early can really boost your momentum, confidence, and reinforce a positive perspective that you can get yourself out of debt if you stay consistent.
On the other hand, you may end up paying more in interest depending on your debts. In the above example, you would be working to pay off medical debt first, but that bill doesn’t cost you a cent in interest. Meanwhile, your other debts are charging you interest. In this case, it’s more expensive to focus on the medical debt as the first priority.
Snowball is great for you if:
- You prefer quicker wins to keep you motivated.
Which Method Suits You?
We are all different and we all have our own unique set of strengths, challenges, past experiences, and motivations.
In order to pick the right approach, organize your debts using both approaches and compare/contrast the differences.
You can even calculate how long it will take you to get out of debt using either scenario. It may barely make a difference, or the delta could be huge!
Then, consider the type of person you are. Do not discount your emotions in this!
If you know you tend to make emotionally-driven decisions, and/or could benefit from seeing some quick wins, go for the snowball.
If you tend to approach money “by the numbers”, the avalanche may make more sense for you.
Both methods can be effective, just pick what’s right for you and get after it! You can always switch up later if you like.
Confession: The Snowball Vs. Avalanche debate is an annoying one to me (LOL).
Not because I don’t love a good debate (I do), I just believe the “better” approach depends on the person.
Some people are capable of thinking and acting purely by “the numbers”, but that’s not most people.
For many, building up momentum helps build the strength to keep going.
Either way, consistency is key! Both methods will require you to not give up, as that IS the only way out.
Use this opportunity to learn more about the current state of your money mindset, and then pick what’s right for you. There’s no wrong answer here as long as it serves YOU!