Accelerated Debt Payoff: Debt Snowball vs Debt Avalanche
Accelerated debt payoff using either debt snowball or debt avalanche will help you clear debt fast. Choose which one would be better for you.
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For accelerated debt payoff, you can use either debt snowball or debt avalanche. Find out which one is best for you.
When you have a lot of debt with high interest, it only makes sense to clear it as fast as you can. An accelerated debt payoff plan using either the snowball or the avalanche method can help you save a lot of money.
You’re neck-deep in debt and sinking fast.
You’ve looked at your budget, tightened it the best way you can and you see that you have some extra money that you can now use to start clearing
But you don’t seem to be making a dent. Interest is piling up and you just know, a few more months like this and you won’t be able to pay anything.
What do you do? How do you clear debt fast?
Assuming that you’ve already done the preliminary work and you’re now in the process of designing a plan to tackle the huge debt you’ve managed to accumulate, you can start employing a debt reduction method.
Two of the most popular are the Debt Avalanche and the Debt Snowball.
We use and recommend the first.
But what exactly is this mysterious Debt Avalanche Method you briefly mentioned but didn’t bother to explain in your previous post, Kevin and Jade?
How is it different from the Debt Snowball that speakers like Dave Ramsey talk about?
And what is it with all these names anyway? Couldn’t anyone think of something a bit sunnier?
RESOURCES:
How To Improve Financial Literacy – A complete list of financial resources for toddlers and their parents.
How To Get Rich And Stay Rich – Financial lessons learned from The Richest Man In Babylon.
Financial Planning Tips – Concrete tips that will help you learn how to stop living from paycheck to paycheck.
Get Out Of Debt Fast: A Proven Plan to Stay Debt-Free Forever – An excellent online course that will help you get out of debt fast and not get into debt ever again.
The Complete Personal Finance Course: Save, Protect, Make More – A complete personal finance course online that will help you significantly increase your net worth.
Accelerated debt payoff #1: Debt Avalanche Method
“
AVALANCHE
noun
1
a large amount of ice, snow and rock falling quickly down the side of a mountain
2
too many things that arrive or happen at the same time
Cambridge Dictionary
Simply put, the Debt Avalanche Method is an accelerated debt payoff plan.
It means that if you need to pay off six different accounts, you start with the account that has the highest interest.
We used this calculator to map out our debt reduction plan.
Interestingly, it doesn’t use the term avalanche at all, just snowball. In any case, the default option is calculating your debt reduction plan in interest order (AKA avalanche) whilst balance order was added later (AKA snowball).
Let’s imagine, for example, that you have set aside £600 to pay off the following debts:
Because you are using Debt Avalanche, your order of priority will be as follows:
Why?
You start with Card F because it’s interest rate is highest at 34.08%. So you pay off the minimum for Cards A to E and put most of your money on Card F.
Once Card F is cleared, you follow it with Card C. Once again, you pay the minimum for the other cards and then put most of your money on Card C.
Then Card A, Card D, Card E and finally, Card B.
If you do the avalanche correctly, you’ll be debt-free in 36 months. You’ll have paid a total of £5,485 in interest.
At last! An end in sight.
Here is the screenshot of the calculator’s output, which should give you the big picture:
Accelerated debt payoff #2: Debt Snowball Method
Snowball
noun
1
a ball of snow pressed together in the hands, especially for throwing
Cambridge Dictionary
On the other hand, if you are using the Debt Snowball Method then instead of starting with the account that has the highest interest, you pay off the account that has the smallest balance first.
Your payment order will then be as follows:
You’ll still need 36 months in order to be debt-free but you’ll have paid an additional £149 in interest.
Here is the screenshot of the calculator’s output using balance order instead of interest:
Which is better and why?
Well, if you look at the numbers and approach the problem from a purely logical perspective, clearly Debt Avalanche is the way to go.
BUT, humans aren’t purely logical. We’re very complex and we rely on both logic and emotion to make decisions. That’s true even for things that should only be looked at logically.
In fact, studies have already shown that most people need a psychological boost – a motivating enough reason to keep going – to complete their debt reduction plan.
What do we mean?
Sometimes, the debt with the highest interest also takes the longest time to pay. The example above doesn’t really show this because both avalanche and snowball starts with Card F, which is not only the debt with the lowest balance. It also has the highest interest.
This means that in less than six months, regardless of what method you choose, you would’ve cleared that first debt. Can you imagine what it would feel like to clear debt off one of your accounts? Won’t you feel even more motivated to get going?
Following the Snowball Method, the second debt would’ve been Card D and you’d have cleared it only 7 months after you’ve cleared the first debt.
Now, compare this with the 20 months it takes to clear the second debt if you’re following the Avalanche Method. Can you feel your heart sinking?
Doesn’t it seem like such hard work – getting rid of the debt in Card D? Don’t you almost feel tempted to give up?
That’s really all it is.
According to studies from the University of Michigan, Northwestern Kellogg and the Boston School of Business, greatest success is achieved by most people if they use the small victories approach.
In other words, if you clear the smallest balance first, you have a much higher chance of sticking with your debt reduction plan.
Final thoughts on clearing debt fast
Remember that even with our decisions on money and finances, human psychology has a big impact.
We have chosen to employ the Debt Avalanche Method in order to clear our debts fast. That’s what works for us and that’s what we need.
It doesn’t mean that you need to do the same.
Perhaps the Debt Snowball Method fits your needs and personality better. If that’s the case, why not try logging in What’s the Cost and use their calculator. See what’s available for you and what seems sensible, apply the plan that best fits your needs and then don’t stop until your debt has been cleared.
Sounds almost exciting, doesn’t it? Now, we wake up early in the morning and we actually look forward to paying our bills.
Do you want to weigh into the debate? Debt Avalanche or Snowball, which would you personally choose? Have you used both? Let us know how it went in comments!
Editor’s Note: This post was originally published in March 2019 and has been completely revamped and updated for relevance and comprehensiveness.
I must say have been really lucky I never had to utilize either method but I was so intrigued by these methods. I created a calculator on my own sometimes ago, that works out the exact numbers. There is no doubt that the majority of the time Avalanche is cheaper. That said, snowball is around also for a reason, and as you said it depends on one’s need and personality.
Jordan, that’s amazing! Good for you.
We never thought we’d need to use these either until we did. We really wish we’d known better but there you are. At least now, we have tools and hopefully, by writing about them, we can help others too.
There is indeed a lot of point in what you have put together here, I am a typical example of someone who pays debt wrongly after reading this article, I usually use my emotional feelings to pay of debt which I have realized shouldn’t be done. I love the concept and guide laid out to educate people on what they ought to do when settling debts. I’m glad I found this sooner. Thanks.
You’re welcome but remember that emotions are valid so whichever one you choose, will still work out for you. It’s just snowball will take slightly longer than avalanche. It’s totally fine though because the important thing is you don’t give up mid-way and if that means rewarding your emotions then why not?
Haha, I hadn’t heard of either of these approaches to debt before… I’ve got to say, at first, they both sound more like something that should be avoided! Kidding aside, thank you for laying out the differences between the two methods and the advantages of each. I personally would prefer to pay the least amount in overall interest — it’s just a matter of making the smartest money moves without letting emotions dictate the success.
Haha you’re absolutely right! They should be avoided in that we shouldn’t need them in the first place. How not to go mental and max out your credit cards should be taught in school.
Such great tips and content! I always feel like money is just disappearing from my account, I need to come up with some plans!
Thanks very much, Nikki. We’re really happy that you found our tips and content valuable. We used to feel exactly the same way – like there’s always too many days at the end of the month and really had no idea where all our money was going. If you’re interested in developing a simple and actionable plan, you might be interested in our post, The K&J 2019 Financial Plan.