Deliberating Debt: Snowball or Avalanche?

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If you haven’t heard these two terms in the context of paying off your loans and credit cards, you either don’t have a debt problem or you’re ignoring the problem you have. Those of you with multiple outstanding balances who have done a little research know that aggressive debt repayment has two main options: a snowball or an avalanche.

It’s a funny debate that will never be won because it’s impossible to account for all the variables that make up each individual’s financial burden. It’s also not uncommon for two people with identical problems to see vastly different results from the same strategy. As such, you might struggle to get a conclusive answer as to whether you should attack high-interest loans (avalanche method) or the lowest balances (snowball method) first.

What you will hear from everyone - including myself - is to do whatever works for you. That’s an incredibly frustrating piece of advice when you have no idea what’s going to work for you. It’s like going to a doctor who offers two options for surgery and asks you to pick the one that you think sounds best. Little help here, Doc.

My goal is to point you toward the choice that you can actually imagine delivering successful results. That choice will depend on your loan amounts, personal goals, bad habits and general attitude about money. When you address all the factors and commit to a plan, either the snowball or the avalanche approach should produce results. The only option that will really slow you down is wasting months and years deliberating your tactic.

Debt always seems insurmountable until it’s gone. Let’s figure out what it’s going to take to get you there.  

Snowball

Snowball (verb): to increase, accumulate, expand, or multiply at a rapidly accelerating rate.

In this approach, you get to start with the smallest of your outstanding debts and wipe that off the books, then start on the next biggest and then the next and the next, eventually building a debt snowball that turns into a clean bill of financial health.

Of the two options, this choice feels the most counterintuitive. You could have a $20,000 car loan with a 17% interest rate that bludgeons your bank account every month, and yet the snowball approach has you focusing your extra efforts on the $700 loan you took out from the furniture store that has zero APR for 18 months.

From an interest-paid standpoint, this option seems very backward. From a getting-out-of-debt forever perspective, this approach delivers results that millions of prosperous people standby.

How does it work and why? I see three main factors that make the debt snowball effective.

1. Escalating Payments

With each credit card or student loan balance that disappears, a little bit of money frees up. Even if you pay down an interest-free account, you still put an end to the $30, $40, or $50 dollars a month that was going into that payment.

With that money, you get to increase the amount you pay on the next largest balance and speed up that loan’s demise. It might take a year, but when that second debt gets eliminated, you free up an even bigger chunk to apply to the next blemish on your books. With each vanquished debt you get more firepower to apply to those biggest and baddest dues.

For many, the hardest part of getting out of debt is finding the money with which to do it. As you free up additional funds by eliminating smaller balances, the amount you can pay slowly escalates and the prospect of paying off loans in excess of $50,000 or $100,000 becomes much more feasible.

2. Clear Structure

Debt tries really hard to stick around. From fluctuating interest rates to hidden clauses and fees, lending companies pull out all the stops in an attempt to maintain your financial obligation.

As the hits keep coming and debts remain, it’s so easy to feel defeated and like anything short of winning the lottery won’t help your cause. Even in those hopeless moments, the snowball approach gives you a little consistency to hold onto.

There will always be one balance smaller than the rest. You won’t have to wonder where to put your extra funds and, in a sense, you can ignore some of those more daunting accounts. Note: ignore doesn’t mean avoid or cease payments. Make sure the minimum amount is set to autopay each month and then try not to look at that account. You’ll come back for it when you have a little more wind at your back.

3. Mental Motivation

From the conversations I’ve had, this is why people consider debt snowballing the way to go. Even financial icons like Dave Ramsey tout this approach, and it’s because the logical approach doesn’t always work for emotional people.

Numerically, you want to get rid of those high interest rates. If you’ve got one of those horrific credit cards that charges you 21% APR on a $10,000 balance, that’s almost $158 in interest each month. Each. Month. Clearly, that account needs to be gone before you can feel the financial freedom you want and deserve.

However, if you put all your effort into scrounging up $200 a month to pay on that card, you’ll feel like you’re just pushing sand into the ocean. The balance won’t ever appear to go down and that $200 will be a punch in the gut every time you pay it. In the meantime, while you’re putting so much focus on the big loan, you might let other balances sneak higher. Eventually, you’ll have two credit cards with catastrophic debt and you’ll teeter closer and closer to bankruptcy every day.

If you commit to a debt snowball, you can use that $200 to greater effect in the early going. A credit card at 17% APR with a balance of $1,000 only nets $14 in interest each month, making those $200 payments very effective. When that $1,000 goes off the books, you’ll feel richer and you’ll actually be richer - you’re net worth will have risen by $1,000!

A sense of accomplishment makes virtually every task easier, and that’s no different with our financial efforts. Even if a mathematician argues against this approach, your friendly neighborhood financial advisor (that’s me) will tell you to keep up the great work.

Avalanche

For the mathematician with debt, this approach will likely weigh less heavily on your logic-driven conscience. Take every penny you have, figure out your biggest financial threat, and get to work.

A debt-avalanche mindset doesn’t require much overthinking, but I’ll still point out its two best traits.

1. Big Victories

Talk to anyone who went deeply into debt from student loans and then eventually paid it all back. They’ll tell you that nothing compares to the feeling of conquering a behemoth loan. After being dragged down by monthly payments and interest charges for so long, getting that balance to zero is like having shackles removed.

In an avalanche program, you don’t shy away from the credit cards and student loans that have your net worth deep in the red. Every extra cent goes toward the biggest balance with the highest interest rate. If you drive one credit card down enough, you can redirect your extra funds to another debt that might be costing you more each month.

Since a high balance with excessive interest leads to big monthly payments, the ramifications of paying this debt down in full are extraordinary. Suddenly you have $1,000 each month to put toward other debt or into savings. Your reward for aggressively paying down a substantial loan comes in the form of tremendous financial freedom.

It might take a Herculean effort, but ridding yourself of that largest, meanest balance will have an immediate and profound impact on your life.

2. Mental Motivation

I repeat this point in each category because it’s more or less the reason you won’t find a simple answer as to whether snowball or avalanche is better. It all depends on what will motivate you through this trying process, and for some, that motivation comes by way of shooting for the stars.

Big account balances take a long time to pay off, even when you make payments like clockwork and avoid extra spending. While that discourages some, many people find a little inspiration in watching the monthly interest drop as the balance starts to go down. One month you lose $80 in interest, and it really stings. The next month that number drops to $77, which still hurts, but you have a little evidence of your progress.

You may also find encouragement thinking about how much money you’ll have at your disposal when those monthly payments stop. As opposed to the debt snowball, where the goal is to free up money which will go toward those more daunting balances, the debt avalanche puts you on track to make a big splash when you cross the finish line. Your other loans will be comparatively easy to pay down, and you’ll have proof that no amount of debt is too much for you to conquer.

Some people need a lot of little checkpoints to ensure they stick to the plan and appreciate their progress. Others need a big challenge that will keep them feeling driven. If you tend to fall in the latter category, the debt avalanche may be the best way to push yourself toward success.

Figuring It Out

Even after a reasonably thorough breakdown of the two options, you may not feel like you have a better handle on which approach is right for you. The mathematical component will play a large part in your decision, and that’s not something I can easily cover in a single blog post.

However, I can direct you toward some resources that will help you figure it out. With such a huge percentage of Americans buried in debt, more and more people and companies are coming to the rescue with useful tools and solutions.

Right out of the gate, you can head to unbury.me and use their simple, helpful debt calculator. Plug in all the balances you have with their accompanying interest rates. Then set a monthly payment amount and you’ll get a ton of useful information, including:

● Total debt balance

● Average interest rate

● Estimated paid-in-full date

● Total interest paid

Then you can start adjusting, increasing or decreasing the amount you pay each month. And, to really tie it back to the topic at hand, you can choose between a debt snowball or a debt avalanche to see how much it will cost you in interest and how each approach might affect your timeline.

You can’t get too far into the details, but unbury.me will serve as a great guide if you’re feeling like it’s a coin flip between snowball and avalanche. As you eliminate debts or change the amount you can pay each month, just adjust your numbers on the website and see if it makes sense to change your tactic.

Should you need a little more help with your finances as a whole, check out any of the budgeting apps. Mint, YNAB, QuickBooks - each of these options will help you see your debt in the context of what you make and what you spend. This will help you A) spend less and save more, and B) figure out what you can realistically spend each month on your debt. When it comes to getting rid of credit cards and student loans, few things are as useful as establishing a smart, detailed budget. Look into any of the popular budgeting software programs and see if you find something you like.

Some of you will try the snowball, some of you will have a go at the avalanche. As long as you commit to the program you choose, I’m confident that every one of you will have success getting out of debt and starting your financial life anew. And, if you’ve already had success with either approach, I’d love to hear about it in the comments!

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