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Has your debt got the best of you? Are you finally ready to start paying off debt and kick it to the curve once and for all? It’s time to get serious, mama.
You’re going to need a killer debt payoff strategy to help you get there and I’ve got just the comparison for you. The debt snowball vs debt avalanche.
You see, when it comes to debt payoff strategies, you need to make a plan. Throwing little bits of cash at whatever and whenever isn’t going to get you far. Without a plan, how will you know where you are going?
You may have heard of the debt snowball and the debt avalanche. Both are two different debt repayment options designed to help you aggressively pay off your debt at a fast pace.
In this article, I will be discussing these two methods of debt repayment in detail so that you will have all the information you need to choose the best one for you.
What is the Difference Between the Debt Snowball and Debt Avalanche?
If you’ve done a little research, you’ll find many personal finance experts torn between the debt snowball vs debt avalanche. It’s a pretty hot debate.
On one side of the spectrum, you’ll find Dave Ramsey, who is dead-set on the snowball method. On the other end, you’ll run into realists, like Suzie Orman who claim the debt avalanche method is the correct way to pay off debt.
One method is focused on numbers while the other is focused on motivation.
Either method works, but since are all human, we need to account for different factors such as emotions, physical state, and resources in order to decide which method to pay off debt is best for you.
First, I will explain each method and then we will run the numbers with a few scenarios. I’ll even throw in some research to back up my personal opinion. At the end of this article, you will be able to decide which method will help you get out of debt.
Are you ready to become debt free?
How to Pay Off Debt with the Debt Snowball
The debt snowball was popularized by Dave Ramsey. He wrote the familiar book, The Total Money Makeover, and has helped thousands if not millions of people become debt free. You can purchase his book here if you’d like to read it for yourself. It’s only one of the top personal finance books of all time.
The debt snowball is a method of debt repayment that focuses on small wins. The idea is to pay off the debt starting with the smallest balance first, then working your way up to the largest balance one at a time.
Dave Ramsey states, money is 20% math, 80% behavior. Most of us know how to run the numbers, but what most people lack is the motivation to keep going. This is especially important when you don’t see any progress.
With small wins, you think to yourself, “Hey!, I did it!” and “I’ve got this!”.
With the debt snowball method, the key to it’s success is the way it is designed. Small wins will lead to giant gains.
Here’s how the debt snowball works:
- First, make the minimum payments on ALL of your debts
- Use the leftover money to start paying off your debt with the smallest balance first
- Once that debt is paid off, use the leftover money PLUS your previous minimum payment to pay the next largest debt.
- Continue this cycle until you are debt free
Pros: Pay off debt at a rapid rate, stay motivated with small wins, build momentum early on, easier to stay on track
Cons: Lose more money in interest over the long run
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How to Pay Off Debt with the Debt Avalanche
The debt avalanche method is similar in that it is an accelerated debt payoff strategy. It was popularized by Suzie Orman, another personal finance expert. Her book, Woman and Money has also helped thousands of people become debt free. You can purchase her book here if you’d like to read it for yourself.
The debt avalanche is debt repayment option that focuses on paying off the debt with the highest interest rate first. The idea is that you will end up paying less interest over time.
People who tend to obsess over numbers, are logical, and want to save the most money tend to gravitate towards the debt avalanche. They already have the determination to pay off debt, they have likely made a plan, and are rational in their thinking.
Here’s how the debt avalanche works:
- First, make the minimum payments on all of your debts
- Use the leftover money to start paying off the debt with the highest interest
- Once that debt is paid off, use the leftover money PLUS your previous minimum payment to pay off the debt with the next highest interest rate
- Continue this cycle until you are debt free
Pros: You pay the least amount in interest, pay off debt fast
Cons: Difficult to stay motivated in the beginning, won’t build momentum in the beginning
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Numbers Don’t Lie: Debt Avalanche is the Correct Way to Pay Off Debt
Let’s run the numbers to examine the rational side of why the debt avalanche method is the mathematically correct way to pay off debt.
Scenario: Mary and her husband have a total of $58,000 worth of debt. Let’s assume that after making minimum payments to all of their debts, they have an extra $150 dollars to put towards debt.
- Car: 2% APR, $450 min payment, $15,800 balance
- Visa Credit Card: 17% APR, $56 min payment, $2,600 balance
- American Express Credit Card: 12% APR, $100 min payment, $4,000 balance
- Student Loan #1: 6.8% APR, $125 min payment, $11,000 balance
- Student loan #2: 6.8% APR, $275 min payment, $16,600 balance
- Disney Credit Card: 21% APR, $150 min payment, $8,000 balance
Using the debt snowball, Mary and her husband will become debt free in 4 years 6 months and will have paid $12,043 in interest.
Using the debt avalanche, Mary and her husband will become debt free in 4 years and 6 months but will have only paid $11,359 in interest.
As you can see above, the difference between the debt snowball and the debt avalanche here is $684 over 4 and a half years. You will see that one method is not necessarily faster than the other. I’ve done a few different scenarios and found that if there is a difference, it’s usually just a few months.
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Psychology Doesn’t Lie: Debt Snowball is the Best Way to Pay Off Debt
Clearly, the debt avalanche seems the most logical and mathematically correct way to pay off debt. You’ll save the most money using this method.
However, is it the the one that will work for you?
Humans aren’t the most rational beings. We are driven strongly by emotions which can make it very difficult to remain on the logical path of debt freedom.
The behavioral aspect of the way we handle money has a significant effect on our actions.
In the above example, using the debt avalanche method will have your first debt paid off in 3 years and 1 month. But using the debt snowball method has your first debt paid off in just 1 year and 3 months.
Would you like an entire debt knocked off in more than half the time? Or would you keep trucking along for another 2 years (nearly) to see real progress?
Harvard Business Review conducted a study in 2016. After analyzing the accounts of almost 6,000 clients of a financial services company over three years, researchers found that:
- Those who paid their accounts one at a time, as opposed to those who spread them out over multiple accounts, were more motivated and paid off their debt 15% quicker.
- Those who paid down accounts with the smallest balances had the greatest sense of progress and were most motivated.
- They also found that unless you are able to consolidate your debt at a significantly lower rate, the bigger balance could be more discouraging to tackle. Despite the savings over the long term, the higher balance proves to be a bigger challenge with a lower success rate.
In summary, the debt snowball method was the most effective way to pay off debt.
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Which debt repayment plan is right for you?
It all comes down to knowing and understanding your emotions. Are you a numbers person who thinks logically and rationally? Are you free-spirited and driven by emotion?
Will the end savings motivate you, even though it may be 5 years from now? Or will small wins keep you on track?
Ultimately, the choice is yours.
Personally, I chose the debt snowball to pay off $26,000 worth of debt. My credit cards were the first to go, then my car, then my student loans. I was debt free in 2 years using my income alone. Plus, I was able to save for maternity leave during this time.
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A Perfect Tool to Find Out Which Method to Use
If you are having trouble deciding which method to chose or would like to run the numbers yourself, here is a free debt repayment calculator.
Input your numbers and it will tell you how long you will be debt free and how much interest you will end up paying over the course of your loans.