When it comes to getting out of debt, there are a few popular methods that people use. One is the debt snowball method and the other is the debt avalanche method. Both of these methods have their own advantages and disadvantages, so it can be tough to decide which one is right for you. In this article, we will explain what each of these methods are and help you decide which one is best for your specific situation!

What is the Debt Avalanche Method?

The debt avalanche method is a debt repayment strategy in which debt with the highest interest rate is paid off first. The logic behind this method is that by paying off debt with the highest interest rate first, you will save money on interest payments in the long run. To use this method, list all of your debts from the highest interest rate to the lowest. Then, make the minimum payments on all of your debts except for the debt with the highest interest rate. Put as much money as possible towards paying off that debt. Once it is paid off, move on to the debt with the next highest interest rate and so on. While this method may take longer to pay off some debts, it can save you money in interest payments over time.

Debt Avalanche Method Example

Assuming you have $500 extra (i.e. on top of the minimum monthly payments you should be paying at the very least) to put towards your debt each month, here is an example of how you could use the debt avalanche method to pay off three debts with different interest rates. Let’s say you have:

• a credit card with a balance of $5,000 and an interest rate of 15%,
• a car loan with a balance of $10,000 and an interest rate of 5%, and
• a student loan with a balance of $15,000 and an interest rate of 3%.

You would start by putting the $500 towards the credit card debt, since it has the highest interest rate. Once the credit card debt is paid off, you would then focus on the car loan by putting the entire $500 a month towards those payments. Once the car loan has been fully paid off you shift the focus to the student loan balance.

By paying off the debts with the highest interest rates first, you save money on interest payments. In this example, you would save a total of $2,250 in interest payments.

Pros & Cons of the Debt Avalanche Method:

• Pros
  • Saves you money on interest payments in the long run
  • Shortens the time to become fully debt free
• Cons
  • Requires discipline and patience to stick with it

What is the Debt Snowball Method?

The debt snowball method is a debt reduction strategy in which you focus on paying off your smallest debt first, regardless of interest rate. Once that debt is paid off, you roll the money you were using to make payments on that debt into payments on your next-smallest debt, and so on until all of your debts are paid off. The debt snowball method can be an effective way to pay off debt because it gives you quick wins that can help keep you motivated. Additionally, by focusing on the smallest debt first, you can get rid of low-hanging fruit and quickly reduce the number of debts you have to keep track of. The debt snowball method can be an effective way to pay off debt, but it’s important to make sure that you’re also making the minimum payments on your other debts so that you don’t end up incurring late fees or damaging your credit score.

Pros & Cons of the Debt Snowball Method:

• Pros
  • Can give you quick wins and keep you motivated
  • Easy method to apply
  • Can reduce the number of debts you have quicker
• Cons
  • Might not be the most cost effective way to pay off debt as you incur more interest
  • Can take longer to fully get out of debt

What is the difference between debt snowball and debt avalanche methods?

The main difference between the snowball and avalanche methods is the order in which you pay off your debts. In both cases you will always want to put at least the minimum payment towards all other debts that are not currently in focus. With the Debt Avalanche method you start by paying off the debt with the highest interest rate. Once that debt is paid off, you move on to the debt with the next highest interest rate.

With the Debt Snowball method you start by paying off the smallest debt first, regardless of the interest rate. Once that debt is paid off, you move on to the next smallest debt. The main difference between these two methods is that the avalanche method saves you money on interest payments in the long run because you are focusing on paying off debts with high interest rates first. The snowball method might be more motivating because it gives you quick wins, but it can be less cost effective because you might incur more interest payments over time by not focusing on debts with high interest rates first.

Should I use the Snowball method or the Avalanche method – which is better?

Determining which method is better depends on which lens we are looking through. The avalanche method is more cost efficient because you focus on paying off the debts with the highest interest rates first and hence saves you more money. This method requires a lot more discipline and can seem like you’re not really making a dent in your debts. The snowball method might be more motivating because it gives you quick wins as you quickly see your smaller debts get paid off. This might, however, come at the expense of paying more in interest payments over time. So, if you are disciplined and want to save the most money, the Avalanche method might work best for you while the Snowball method may be better if you need to stay motivated and prefer to pay off debts without having to compare interest rates. Hungry for more pointers? Check out our 10 tips on how to pay off credit card debt fast next.