Have you made paying off your debt one of your financial goals that you want to work on this year? If so, you’ve come to the right place! Paying off debt can seem overwhelming and maybe even feels like an impossible dream that will never happen. But it doesn’t have to be that way. All you need is a plan! That’s where the debt snowball and debt avalanche methods come in – two different strategies to pay off your debt.

Debt Snowball Versus Debt Avalanche

Both methods start out the same. First make a list of all your debts. This list includes the name of the debt (ie: credit card), the balance, minimum monthly payment and the interest rate. Second, make the minimum payment on all of your debts, except for the first debt on your list. Once the first debt is paid off, you take the money that was being paid towards that debt and now put it towards the second debt. Keep going – as each debt is paid off, put that money towards the next debt on your list.

So, what’s the difference between the two methods? It all comes down to the order of your debts. For the debt snowball method, you pay off your debts from the smallest to the largest balance. For the debt avalanche method, you pay off your debts from the highest to lowest interest rate.

Can’t decide which method to use to help you pay off your debt? Use this handy debt repayment tool from my Etsy shop to help you figure out which method is right for you!

Debt Snowball vs Debt Avalanche - See which method works best for you!
Debt Snowball vs Debt Avalanche – See which method works best for you!

Debt Snowball Method Overview

For the debt snowball method, you list your debts from the smallest to largest balance. You make the minimum payment on all debt and put extra money towards the debt with the smallest balance. As each debt is paid off, you focus on the next debt by putting that extra money towards it. The main benefit of using this method is that it builds motivation to keep going, as you see your debts being paid off.

Debt Snowball Example

For example, pretend you have the following debts:

  • Credit card debt of $15,000, with a minimum monthly payment of $300 and an interest rate of 15%;
  • A line of credit of $3,000, with a minimum monthly payment of $60 and an interest rate of 5%; and
  • A student loan of $20,000, with a minimum monthly payment of $400 and an interest rate of 9%.

You are able to put an extra $440 every month towards your debt, making your total debt repayments $1,200 every month. Using the debt snowball method, you will focus on paying off your line of credit first and put $500/month towards that debt ($60 + $440). The line of credit will be paid off in 7 months and you will be completely debt free in 3 years and 2 months. In this example, you would have paid a total of $6,530.01 in interest.

Advantages and Disadvantages of the Debt Snowball Method

Paying off your debt isn’t sexy or exciting. It’s not something people even talk about that often. But it does feel good to see progress as you can cross debts off your list. That’s the main advantage of the debt snowball method – it builds motivation as you see your debts being paid off. It’s also easy to implement. However, this method is the also the reason for the main disadvantage – that being you will pay more in interest charges compared to the debt avalanche method. This makes the debt snowball method more expensive in the long run and it takes longer to become debt free.

Debt Snowball Method
Debt Snowball Method

Debt Avalanche Method Overview

For the debt avalanche method, you list your debts from the highest to lowest interest rate. You make the minimum payment on all debt and put extra money towards the debt with the highest interest rate. As each debt is paid off, you put extra money towards the next debt. The main benefit of using this method is that it minimizes the amount of interest paid over time.

Debt Snowball Example

Let’s use the same example from above. Here’s a quick recap of the details:

  • Credit card debt of $15,000, with a minimum monthly payment of $300 and an interest rate of 15%;
  • A line of credit of $3,000, with a minimum monthly payment of $60 and an interest rate of 5%; and
  • A student loan of $20,000, with a minimum monthly payment of $400 and an interest rate of 9%.

You are able to put an extra $440 every month towards your debt, making your total debt repayments $1,200 every month. Using the debt avalanche method, you will focus on paying off your credit card first, as that has a high interest rate of 15%. For this debt, you are putting $740/month towards it ($300 + $440). However, this will take you 2 years to pay off your credit card balance! That’s why the debt avalanche method requires patience and dedication, even when it feels like you are not making progress.

Advantages and Disadvantages of the Debt Avalanche Method

To really understand the advantages of the debt avalanche method, let’s go back to our example. In this example, using the debt avalanche method, you will be completely debt free in 3 years and 1 months. In this example, you would have paid a total of $5,950.31 in interest. Compared to the debt snowball method, you will be debt free one month sooner and saved yourself $5790.70 in interest.

Remember, the main advantage of the debt avalanche method is that you pay less in interest charges and may become debt free sooner. However, the disadvantage is that you need more discipline to reach your goals (remember how in the example above, it took 2 years before you paid off the first debt on your list)!

Debt Avalanche Method
Debt Avalanche Method

Which Debt Repayment Method Should You Use?

There are advantages and disadvantages for both methods, making them both valid. Which method you choose really depends upon your personality. Which do you prefer? If you would rather see debts being crossed off your list sooner, then go with the debt snowball method. However, if you love the fact that you’ll be debt free sooner and pay less in interest, then go with the debt avalanche method. There is no right or wrong answer, as long as you reach your goal of becoming debt free!

Special Considerations

There are three other points or special considerations that you need to keep in mind when implementing any debt repayment plan.

First, don’t add new purchases or amounts to your debt. You can’t pay off debt if you are always adding more debt to the balance. What can you do instead? One option is to use cash to pay for your spending, thus ensuring you don’t overspend. Another option is to have a separate credit card, or even a prepaid credit card, that is paid in full each month.  Pick what works for you and stick to it.

Second, make sure you pay your bills on time. Late payments can complicate your debt situation. If you need to, mark the due dates for each bill on a calendar.

Finally, be aware of any exceptions or circumstances on your debt. For example, if there is a period of a lower interest rate. In this example, you may want to focus on paying off that debt during the lower interest rate period. Another example could be is if there is a limit to the amount of extra payments you can put towards the debt. Whatever the exceptions are, write them down and follow the rules.

Until my next blog post, here’s wishing you lots of joy and happiness!

With love,

Joanne

Hi! I'm Joanne. I’m a Canadian Chartered Professional Accountant (CPA, CMA). Money management is a life skill that I passionately believe all people need to learn. As an accountant, I love helping people understand numbers and money. At BuildingJoyAndHappiness, I share my tips to money management and make understanding finances simple.

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