If you feel trapped in debt, you are not alone. As of September 2022, consumer debt in the US is $16.5 trillion, with the average American, having $96,371 in debt. Choosing the right repayment strategy and sticking to it is the key to effectively chipping away at your debt over time. The two most popular and effective methods are the debt snowball and debt avalanche. Let’s break them down so you can decide for yourself which strategy best suits your financial situation.
What is Debt Avalanche?
Debt avalanche focuses on paying off the most expensive debt first, followed by the debt with the next most expensive debt, and so on. This method can help you save money on your interests while keeping the repayment period relatively shorter.
- Debt avalanche is a debt repayment strategy where you first focus on paying off the debt with the highest interest and work down from there.
- Helps you save money on interest charges with a relatively shorter repayment period.
- It requires discipline and self-motivation.
How to implement the debt avalanche method?
Step 1: Make a list of all your outstanding debts including the total amount you owe, the minimum monthly payment you need to make, and the interest rate for each debt.
Step 2: Arrange the list with descending interest rates. So, the highest-interest debt will be at the top of the list, followed by the next most expensive debt, and so on.
Step 3: Now focus on paying off the debt with the highest interest rate. Try to put as much money as your budget allows into this till the debt is fully paid. Keep on paying the minimum monthly payments for all the other debts.
Step 4: Continue this process until all your debts are paid off.
Pros and cons of debt avalanche :
| Pros | Cons |
|---|---|
| Helps you save money on interest charges | It takes discipline and longer-term commitment to pull off |
| Payments will decrease over time | If your highest-interest debt is also the biggest one, it won’t be a quick win |
| Usually requires a shorter repayment period | Not ideal if all your debts are low-interest ones |
Is the debt avalanche strategy right for you?
If you are someone who is
- Disciplined and self-motivated
- Have sufficient disposable income
- Willing to save money and time in the longer term
Then the debt avalanche strategy is right for you.
What is debt snowball?
The debt snowball is a debt repayment strategy where you focus on paying off your smallest debt balance first before moving on to the bigger ones. In this strategy, you list down your debts in ascending order starting with your smallest debt balance, paying off your smallest debt as much as possible while paying minimum payments to the remaining debts.
Once you pay off your lowest debt, you can use the fund previously allocated for your lowest debt repayment to pay off your next lowest debt, thus building momentum and “snowballing” your repayment toward your next debt. You keep on “snowballing” your repayment till all your debt is paid off.
- The debt snowball is a popular debt repayment strategy, popularized by personal finance guide Dave Ramsey.
- The debtor pays off the smallest debt first before moving on to the next smallest debt and so on.
- You get quick wins by paying off the smallest debt first, which gives a psychological boost to stick to the debt repayment plan.
How to implement the debt snowball method?
Step 1: List down all your debts and arrange them in ascending order starting with the smallest one.
Step 2: Each month, pay as much as possible for your smallest debt, and pay the minimum payment for the remaining debts.
Step 3: Once you pay off the smallest debt, use the amount that was previously allocated for that debt to pay off your next smallest debt.
Step 4: Repeat the process till you pay off all your debts.
Pros and cons of debt snowball :
| Pros | Cons |
|---|---|
| Helps you get rid of smaller debts faster | You will likely pay more in interest payment over the long run |
| Keeps you motivated to stick to your debt repayment plan | Payments will increase over time |
| Helps improve money-management skills | Longer repayment period |
Is the debt snowball strategy right for you?
If you are someone who is
- Holding several low-interest debts
- Needs the motivation to stick to your debt repayment plan
- Finds it encouraging to see your debt paid off one by one
Then the debt avalanche strategy is right for you.
Debt Avalanche vs Debt Snowball: Which is better?
| Debt Avalanche | Debt Snowball |
|---|---|
| Debt avalanche focuses on paying off the most expensive debt first, followed by the debt with the next most expensive debt, and so on | Debt snowball is a debt repayment strategy where you focus on paying off your smallest debt balance first before moving on to the bigger ones |
| Helps you save money on interest charges | You will likely pay more in interest payment over the long run |
| Reduces your number of debts faster | Reduces your total debt faster |
| Payments will decrease over time | Payments will increase over time |
| Usually requires a shorter repayment period | Usually requires a longer repayment period |
| Keeps you motivated to stick to your debt repayment plan as you can see the results quickly | Requires discipline and self-motivation as it can take a while to see the results |
| Best suited to consumers with several high-interest debts | Best suited to consumers with several low-interest debts |
| Ideal when you have sufficient disposable income | Ideal when you don’t have sufficient disposable income to pay for the larger debts |
The bottom line
Both the debt avalanche and debt snowball are very popular and effective strategies with certain pros and cons when it comes to debt repayment. While one strategy will suit your financial situation better, that might not be the ideal strategy for someone else.
The best debt repayment strategy for you will ultimately depend on the strategy you think you can stick to and the one that works best for your loan type, interest rates, cash flow situation, and long-term goals.
If you have debt that has a wide spread in interest rates, the avalanche method will be even more powerful. On the other hand, If you have numerous smaller debts with similar interest rates, the snowball method may help you manage the repayment process with more discipline.
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