There are different strategies you should utilize to scale back your debt, but two of the preferred are the debt snowball and the debt avalanche methods.
The debt snowball pays off the smallest debt first, and the debt avalanche focuses on paying the high-interest debt first. The next guide explores the professionals and cons of each methods, so you possibly can determine which one is correct for you.
What’s the debt snowball method?
The debt snowball method is a debt repayment strategy where you repay your debts within the order of smallest to largest balance, no matter rate of interest.
With the debt snowball method, you’ll make minimum payments on all of your debts and put any extra cash toward the smallest debt until that first low balance is paid off. When you repay the smallest debt, you’ll take the cash you were using to repay that debt and use it to pay your next smallest debt, and so forth.
Many individuals who use the debt snowball method track their progress using a spreadsheet. A spreadsheet is not going to only keep you organized but may also help motivate you as you mark off your payments.
Pros and Cons of the debt snowball method
- Easy to establish and track, especially in case you use a debt snowball calculator to create your payoff schedule
- Those that thrive with quick wins will stay motivated by paying off those small balances
- As you repay your smaller debts, you may lower your monthly debt commitment
- Won’t prevent as much in interest as other debt repayment methods unless your smallest debts also occur to be those together with your highest rates of interest
- May take just a little longer to get out of debt than with other methods since you’re accumulating that extra interest
The right way to apply the debt snowball method
Let’s say you may have $1,200 you possibly can afford to place every month to pay the next debts:
| Loan Type | Loan Balance | Interest Rate | Minimum Payment |
| Bank card | $9K | 22.99% | $260 |
| Bank card | $2K | 24.99% | $60 |
| Auto loan | $8K | 3.50% | $250 |
| Student loan | $18K | 4.50% | $300 |
Using the debt snowball method, the concept is to pay the $2,000 bank card first since it is the smallest of the 4 debts. You’ll make all of your minimum monthly payments and send any additional money out of your $1,200 repayment budget to that $2,000 card, paying off that first card balance.
You’ll then tackle the auto loan while continuing to pay the minimum payments in your other bank card and student loan. When the automotive loan is paid off, you may say goodbye to that second bank card. Finally, all $1,200 will go to wiping out that student loan.
What’s a debt avalanche?
A debt avalanche, also referred to as debt stacking, requires that you simply repay your debt so as of the very best to lowest rate of interest, no matter your debt balances or the varieties of debt you may have.
With the debt avalanche, you make minimum payments on all debts after which put any extra money toward paying down the debt with the very best rate of interest. When you repay that first debt, you’re taking that cash and put it towards the following highest rate of interest and keep working through your debts.
Since you repay your higher-interest debts first, you pay down your debts faster because you’re saving on interest that may go toward the principal.
Pros and cons of the debt avalanche
- Saves you probably the most money in interest payments
- Is quicker than other debt repayment strategies — in case you’re consistent with the payments
- It might be several months and even a couple of years before that first debt is paid off
- Because it would take a protracted time to repay your first few debts, you’ll still be accountable for all those minimum payments until you finally get something paid off
The right way to apply the debt avalanche system
Here is how a debt avalanche repayment plan would work. (The next example uses the identical numbers and loans used for the debt snowball method.)
| Loan Type | Loan Balance | Interest Rate | Minimum Payment |
| Bank card | $9K | 22.99% | $260 |
| Bank card | $2K | 24.99% | $60 |
| Auto loan | $8K | 3.50% | $250 |
| Student loan | $18K | 4.50% | $300 |
With the debt avalanche payoff method, the 24.99% rate of interest bank card can be the primary debt you pay down while making minimum payments in your other three debts. Next, you give attention to paying off the 22.99% bank card.
With just your two low-interest loans remaining, you next repay your student loan and at last knock out the auto loan.
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What do you have to expect with the debt snowball vs debt avalanche repayment plan options?
While the snowball and avalanche methods approach debt repayment in a different way, there are some common things to expect when using either of those debt repayment strategies.
Know you possibly can pay greater than the minimum payments
Whether you are using the snowball or avalanche method, it’s beneficial you make minimum payments on all debts aside from the one you are attempting to repay. Nevertheless, you possibly can modify this guideline to raised fit your financial goals or budget. For instance, you may add $25 to every of your minimums after which put any extra cash toward the smallest balance card or highest rate of interest.
If maintaining with all those minimum payments is simply too much, consider debt consolidation and mix all of your debts into one loan with one monthly payment. Consolidation is just an excellent option for some people, so remember to research and compare the best debt consolidation loans.
Be prepared to be flexible
Even the best-laid debt repayment plan might should be updated over the course of your debt journey. Variable rates of interest change. Perhaps you may have to cover an emergency using your smallest balance card. If essential, reorder your debts based on whatever repayment method you employ. Change methods in case you find it difficult to stick to your chosen repayment method.
The debt snowball and debt avalanche are great repayment strategies but do not forget about other tools that may be just as useful. Consider whether debt consolidation or skilled help might move you along your repayment journey even faster. A repayment strategy won’t do you any good when you’re behind on payments. A debt counselor or other financial skilled can advise you on how one can negotiate with debt collectors and suggest the perfect repayment solution on your situation.
Don’t keep adding to the bank card balance
Neither the snowball nor the avalanche method will improve your financial situation in case you proceed adding to your bank card debt. You need to use a debt-to-income ratio calculator to assist make sure you’re moving in the suitable direction. Your debt-to-income ratio should progressively improve in case you persist with your debt payoff plan and refrain from adding to your bank card balances. This, after all, assumes your income stays the identical.
Debt snowball method or debt avalanche method — which is best for you?
To find out which is healthier, the debt snowball or debt avalanche, you’ll want to determine whether knocking out individual debts or watching your monthly interest decrease will motivate you more.
A straightforward solution to settle the debt avalanche vs snowball debate is to crunch the numbers using each methods after which consider whether those small wins or less interest will do more to maintain you on the right track.
You’ll find a “debt snowball vs. avalanche” calculator online that can easily do the maths for you and offer you a payoff schedule for every method. Consider how long it is going to take to repay your individual debts, your total debt and the way much you may pay in interest using each strategy.
One other common repayment strategy is to mix the 2 methods. Get a couple of quick wins using a debt snowball, then switch to the avalanche method to save lots of on those larger debts.
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Repay your debt in a way that works together with your financial goals
When determining the perfect debt payoff strategy on your debt load and budget, the choice is more complex than considering the debt snowball vs debt avalanche. Consider your financial goals as well. In case your goal is to get out of debt quickly or to stop wasting money on loan interest, then go along with the debt avalanche.
Nevertheless, suppose your budget is tight, and getting out from under a couple of debts can create respiratory room or permit you to put more cash toward your emergency fund. In that case, the debt snowball may be the higher option despite the additional interest you could ultimately pay.
Create a debt payoff plan you possibly can live with and shift gears when essential to finish your debt payoff journey.