Debt Snowball Vs. Avalanche

First off, what is a debt snowball and why the hell would I want one?

The debt snowball method is simply a metaphor for paying off debt.

If you have any kind of debt, then this applies to you. Mortgage debt is something entirely different which we can discuss in another section, but if you have credit card debt, personal loans, student loan debt, charge card debt, auto debt then this is all applicable.

The Debt Snowball Method:

Snowball Giff.gif

Ok, so what is the debt snowball method for paying off debt?

This is simply put paying off your smallest balance loan first, while maintaining your minimum monthly payments on all your other debts thus avoiding accruing interest (keeping those other debts at bay), and then rolling the first payment into the second payment when the first payment has been paid off.

In effect your total paid towards debt is constant each month but it is a means of paying down your debts and principles faster than if you were to continue making the minimum payment each month on your monthly debts.

The Debt Avalanche Method:

Avalanche Method.gif

The debt avalanche method is paying off your highest interest rate loan first, while maintaining your minimum payments, then rolling the first payment into the next highest interest rate loan.

Just like with the debt snowball method you are paying the same minimum payments towards each of your loans, only you are paying off the highest interest rate loan first thus saving you money in the long run. I will show you how in just a moment.

One Thing To Focus On

Of the two loan repayment methods there isn’t a “better” one, rather, both methods work but which would you rather see? Quicker results or knowing that you will hit your overall goal faster? I will illustrate what I mean below.

Now we are also going to assume, for this example, you can find a way to earn an extra $500 a month, maybe as an uber driver or walking dogs, starting your own side business or working some place else.

If you can generate that extra $500 you will be able to apply that directly towards your loan and thus repay your loans back much much faster.

Here’s an example of the Debt Avalanche in effect with the same numbers:

You would take the highest interest loan and pay that first. In this case it would be your  payment and continue paying your other minimum payments:

Credit card – $189 – %19.99 Loan

Auto – $350 – %5 Loan

Student Loan – $250 – %3.6 Loan

Total Payments each month = $789

Here’s what you would see:

The Debt Avalanche Payoff Method

So paying off with the Avalanch method, and applying as little as $500 extra a month towards your payment, can result in you paying your loans off 5 years and 5 months faster than not paying the extra $500 and this will result in a savings of $5,756 in interest.

 

Now lets compare that to the Debt Snowball Method:

The snowball method you would take the lowest balance remaining loan and pay that first. In this case it would be your auto payment, apply $500 extra payment:

Auto – $350 – %5 Loan

Credit card – $189 – %19.99 Loan

Student Loan – $250 – %3.61 Loan

Total Payments each month = $789

Here’s what you would see:

The Debt Snowball Payoff Method

Paying off the Snowball method and applying as little as $500 extra a month towards your payment can result in you paying your loans off 5 years and 5 months faster, saving $5,451 in interest.

So Which is Better, Debt Snowball or Debt Avalanche?

Well if we look at the two repayment periods, keeping all else constant, we can see that both methods show the repayment being 5 years and 5 months faster. Thus saving us the same amount of time.

The Key difference is the interest saved. By simply paying off the highest interest rate loan first and then rolling the excess savings from the previous loan into the next loan repayment we find that we can save $5756 – $5451 = $305.

It may not seem like much, but that’s extra money that you put back in your pocket just by changing the order you repay your loans.

So is it worth it to use the Avalanche method instead of the snow ball method? You decide. One gets your better results in the long run (the avalanche), where as the other gets you instant relief sooner (the snowball).  And we all know that the sooner we can get out from underneath the crushing weight of debt the better.

To get your repayment time frame head over to Nerdwallet and plug in your loans into their repayment calculator and find out which method is best for you. Check out the repayment calculator here.