Debt Snowball vs. Debt Avalanche: How Should You Destroy Your Debt?

When it comes to debt, we’ve already covered how much it can cost you in the long run.

It’s in your best interest to pay it down as quickly as possible.

So what’s the best strategy?

There are two that I’ve seen that make sense, so let’s break both of them down.

The Debt Snowball

This is a strategy advocated by popular personal finance personality Dave Ramsey, who also coined the term.

The idea is that you make a list of your debts and then order them from the smallest remaining balance to the largest.

So if these are your debts:

Debt	Balance	Minimum	APR
AmEx Credit Card	$653	$15.00	14.99%
Visa Credit Card	$1,963	$39.26	18.61%
Master Card	$2,415	$96.60	12.31%
Student Loan 1	$9,586	$95.86	4.66%
Student Loan 2	$3,127	$50.00	3.50%
Student Loan 3	$15,687	$156.87	4.15%
Totals:	$33,431	$453.59

You’d want to arrange them like this:

Debt	Balance	Minimum	APR
AmEx Credit Card	$653	$15.00	14.99%
Visa Credit Card	$1,963	$39.26	18.61%
Master Card	$2,415	$96.60	12.31%
Student Loan 2	$3,127	$50.00	3.50%
Student Loan 1	$9,586	$95.86	4.66%
Student Loan 3	$15,687	$156.87	4.15%
Totals:	$33,431	$453.59

You pay the minimum on all your debts, but pay as much extra as you can towards the debt on the top of this list.

Once you pay the top debt off, you apply all the money that was going toward it to the second debt on the list and you keep going.

Why This Approach Works

The main reason why this is effective is because you are paying extra each month. This causes you to pay less interest over time, because as you pay down the principal, you pay less in interest each subsequent month.

This means that a higher percent of your minimum payment goes to paying off principal and your extra payments completely go to paying off your balance. This lets you pay off the debt much faster while incurring less total interest.

There’s also the psychological benefit of paying off the top line item quickly, getting rid of a bill forever.

The Debt Avalanche

This is the traditional method for repaying debt.

It starts with a similar premise: list out all your debts with balances, minimums, and interest rates.

The big difference is instead of sorting in ascending order by the balance, you sort in descending order by the interest rate:

Debt	Balance	Minimum	APR
Visa Credit Card	$1,963	$39.26	18.61%
AmEx Credit Card	$653	$15.00	14.99%
Master Card	$2,415	$96.60	12.31%
Student Loan 1	$9,586	$95.86	4.66%
Student Loan 3	$15,687	$156.87	4.15%
Student Loan 2	$3,127	$50.00	3.50%
Totals:	$33,431	$453.59

Just like before, you pay the minimum on the top item until it’s paid off then work your way down the list. You’re just going in a different order.

Why This Approach Works

The core reason why this works is the exact same as the other strategy: You are paying extra every month to pay down your balances faster and incur less interest.

This approach also has the advantage of saving you the most money per extra dollar paid per month.

The reason is that by paying off your highest interest debt first, you keep the total amount of interest you pay to an absolute minimum.

Why Choose The Debt Snowball?

If the approach that I call the Debt Avalanche is mathematically superior, why would you ever choose the debt snowball?

The answer is that we’re humans, not robots. Motivation is a tricky thing, and if you can motivate yourself with the prospect of a “quick win” in the form of eliminating one of your debts entirely, that can help you stay the course.

How to Choose

Flip a coin.

Seriously.

If one approach clearly strikes you as better, pick that one. Otherwise, flip for it. As Ramit Sethi says in I Will Teach You to Be Rich, don’t spend more than five minutes deciding.

There are two critical things you need to do to pay off your debt:

• Pay extra every month
• Start now

Not only does choosing between the two approaches outline above not make the list, it can prevent you from getting started if you take forever to decide.

Paying your debt off is a big win. You get an A+ for putting your debt to rest. You get a big fat F if you delay over minutia.

When it comes to paying off debt or investing, having the courage to get started is more important than having the most perfect plan.