Debt Snowball or Avalanche: What’s the Best Way Out of Debt?

financial plan

With the decision to pay off your debts, you have already taken the first step towards financial independence. It’s not always easy to get there, but don’t panic: there’s light at the end of the tunnel! You can get out of debt and take control of your finances with two simple strategies: the snowball and avalanche methods.

With the decision to pay off your debts, you have already taken the first step towards financial independence. It’s not always easy to get there, but don’t panic: there’s light at the end of the tunnel! You can get out of debt and take control of your finances with two simple strategies: the snowball and avalanche methods. 

Which method you choose depends mainly on you and your situation. Here you will find everything you need to know about the snowball and the avalanche method – you can then select the strategy that suits you. Here we go!

Debt snowball vs. debt avalanche 

The debt snowball and debt avalanche methods first require you to make the minimum monthly payments on all of your debt. Then it’s a matter of pre-empting one (or more) specific posts. The main difference between the two approaches is which of your items you pay off first. 

With the snowball method, you serve the smallest item first and work your way up from there. With the avalanche method, you first pay off the item with the highest interest rate. After that, you focus on the thing with the second-highest interest rate until all your debts are paid off in full. Both approaches have advantages and disadvantages – here we have summarized them for you in an overview:

Debt Snowball

Benefits:

  • You can get started with it quickly.
  • You stay motivated because you get the impression that loans are repaid faster.

Disadvantage:

  • You often lose more money in the long run due to the higher interest rates on the unpaid debt.
  • It may take longer to clear your debt if you don’t service the higher-interest items first.

debt avalanche

Benefits:

  • In the long run, you save more money in the form of interest. 
  • Overall, the debt can be paid off more quickly.

Disadvantage:

  • Requires more discipline as this approach does not always yield quick results.
  • As a result, you may quickly lose motivation and may not pay off the debt at all.

What is the snowball method?

The snowball method aims to give you the feeling of success and financial independence as quickly as possible. This will make it easier for you to stick to your repayment schedule, keep you motivated, and give you a sense of achievement for your efforts. The focus is on paying off the smallest items first – without paying attention to the interest rate. 

After making your minimum monthly repayments, you use any leftover money to pay off the smallest item first. When that item is eliminated, you focus on the next largest item and so on. Like a snowball, it goes on and on until the last – and the largest – item is paid back.

How do you use the snowball method?

  1. Make a list of your current loans. 
  2. Sort them from the smallest loan amount to the largest.
  3. Keep track of your expenses. This will ensure you have enough cash available to make the minimum repayments on your ongoing loans.
  4. Set a budget to have a little extra cash each month. The 50/30/20 rule is a good place to start. 
  5. Pay off your smallest open loan with excess money.
  6. Once that loan is paid off in full, move on to the next larger loan.
  7. Keep doing this until you’ve paid off all your loans.
  8. Keep a healthy budget, and remember to set aside a reserve for the bad times.

An example of the snowball method

Imagine you’ve made the minimum repayments on all of your current loans each month and have $500 leftover. You must repay the following loans:

  • €15,000 student loan with 3.0% APR
  • €3,000 personal loan from a family member with an interest rate of 0.0%
  • $6,000 credit card debt at 24% APR

Here’s how you would pay off that debt using the snowball method:

  1. You start by paying off the loan of €3,000 as this is the smallest loan amount. If you’re paying off an extra $500 a month, it will take six months to repay the loan fully. 
  2. Next up is your $6,000 credit card debt. Considering the APR of 24% and the six months it took you to repay the $3,000, that loan has now accrued $756 in interest. So you now have to pay back €6,756. At 24% APR (2% interest per month), it will take you 15 months to fully repay this loan.
  3. Finally, you start paying off your student loan. Since it has already taken you 21 months to pay off the personal loan and your credit card debt, interest on this loan has now accrued €807. With an additional repayment of €500 a month and 3% APR, it would take 33 months to repay the outstanding €15,807 fully. 

In total, using the snowball method and an additional $500 a month in principal, you would pay back about $27,000 (all loans including interest) in loans in 4.5 years. If this seems like a long time to you, try doubling your savings to €1,000 a month, because then you could pay off all the loans in just under two years – also because less interest would accrue during this time.

What is the avalanche method?

The avalanche method is mathematically a more reasonable approach than the snowball method. The aim here is to repay loans so that as little interest as possible is incurred. While it may take longer to pay off the first loan fully, this method will save you the most money in the long run.

As with the snowball method, you only use the avalanche method once you have made the minimum monthly repayment for all your current loans. After that, you use your remaining money to pay off the loan with the highest interest rate first. Then you take care of the loan with the second-highest interest rate and so on. Last but not least, you pay off the last outstanding loan, which is the one with the lowest interest rate.

How do you use the avalanche method?

  1. Make a list of your current loans.
  2. Sort them from highest to lowest interest rate.
  3. Keep track of your expenses to make sure you can make the minimum monthly payments on all of your loans.
  4. Set a budget for yourself to have a little extra cash each monthThe 50/30/20 rule helps get started with budget planning.
  5. Use your extra cash to first pay off the loan with the highest interest rate.
  6. You take on the loan with the second-highest interest rate when that loan is fully paid off.
  7. Keep doing this until you’ve paid off all your loans.
  8. Establish healthy financial habits and consider creating a personal financial plan to keep your finances under control. 

An example of the avalanche method

Using the same example as the snowball method above, imagine that you have an extra $500 a month to pay off your loans (after making minimum repayments on all of your loans). You have to pay off these loans as in the example above:

  • €15,000 student loan with 3.0% APR 
  • €3,000 personal loan from a family member with an interest rate of 0.0%
  • $6,000 credit card debt at 24% APR

Here’s how you would pay off that debt using the avalanche method:

  1. First, you would pay off your $6,000 credit card debt since this is the loan with the highest interest rate. With an APR of 24%, that would take around 13.5 months.
  2. Next up would be your $15,000 student loan, as it has the second-highest interest rate. Considering that it took you 13.5 months to pay off your credit card debt, that loan has now accrued an additional €504 in interest. So you need about 32 months to repay this loan.
  3. Finally, you take care of the repayment of the private loan of €3,000. With an interest rate of 0.0%, this takes you six months.

In total, using the avalanche method and an additional $500 a month in principal, you would pay back about $25,750 (all loans including interest) in loans in 4.3 years. This means that you are debt-free two months earlier than with the snowball method and save €1,250 in interest!

4.3 years may seem like a long time to you, which is not exactly conducive to motivation. But if you could double your savings to $1,000 a month, you’d be able to pay off all of your loans in just under two years – because the interest accrued would be even less!

Debt Snowball or Avalanche: What’s the Best Way to Pay Off Your Debt?

Deciding which approach is best for you depends entirely on your personality. Take a few minutes and think about the easiest way to do something consistently. Ultimately, whichever method you stick with the longest is best for you. The most important thing is not to give up when paying off debt. Because without motivation, you may give up early – which puts your financial independence further into the distance.

The snowball method: The best method for more motivation

The snowball method is better for you if you find quick results and the feeling of early and tangible success motivating. The reward principle is a useful tool to encourage certain behaviors. On paper, the avalanche method saves you more time and money. But that’s no use if you lose your motivation because the amount still outstanding after months still seems overwhelming. It can also happen that you want to pause your repayment payments or even stop them altogether.

The biggest advantage of the snowball method is that it brings you a sense of accomplishment and financial independence when you can cross loans off your list. Even as you accrue more interest, the sense of accomplishment can be just the spur you need to get out of debt.

The avalanche method: If you want to save as much money as possible

However, if your motivation is to optimize processes and save money (and time), you are probably better off with the avalanche method. With the snowball method, you would quickly lose motivation. After all, you would know that you would lose money from the additional interest. On the other hand, knowing that you pay as little unnecessary interest as possible each month can be an incentive for you. You can also get out of debt faster with the avalanche method!

Helen Miller

Helen Miller is a freelance writer at Usevoucher. She covers personal finance topics in a syndicated column that appears in Financial Planning Magazine. Her work has been featured by Market Watch, Digital Journal, Chicago Tribune, USA Today, and Yahoo Finance. Helen has a bachelor’s degree in finance from the University of California, Los Angeles.