Paying Off Your Debt: The Snowball Plan vs. The Avalanche Method

Oh man, it feels so good to pay things off! Getting rid of debt you’ve been dragging around with you for years is just so satisfying. Goodbye, $5,000 I borrowed to study abroad for one summer! Don’t come back soon, $1,500 I put on a credit card to buy a new laptop! You want to be able to use the money you have now to have all the fun you can afford, not pay off all that fun you had when you were young and dumb about money.

Some real talk for a minute: If you’re serious about paying off your debt, you really need to figure out ways to cut back. You can’t try to pay off the $1,000 worth of bar tabs you accumulated last year from all those after-work happy hours, while adding an additional $1,000 worth of bar tabs this year. You need to give up some of those happy hours, or else nothing will ever get paid off, and you’ll get stuck in this cycle of debt. Of course, bad habits are hard to break, so take baby steps (more advice on saving money here).

Okay, enough of that!

When people make an effort to pay off their debt, they usually try one of either two methods: the “snowball” method, or the “avalanche” method. Let’s get into both, and then talk about which one might work better for you.

Snowballing: The snowball method involves making a list of all the balances you owe to various institutions (credit cards, student loans, car loans, etc.) and then tackling your smallest balance first. What you’d do is pay the monthly minimum on all your balances, except your smallest balance, which you’d pay off the most aggressively by applying as much extra money to it as possible. Once you eliminate the smallest balance, you tackle the next smallest balance, and then the next until you’ve paid everything off.

The Avalanche: This method requires a bit more math. It’s basically the opposite of snowballing, except you’re not paying off your largest balance, but rather your most expensive balance, or the balances with the highest interest rate. So, say you have three credit card balances: $500 with an annual percentage rate of 10%, $2,000 with an APR of 20%, and $5,000 with an APR of 15%, you’d pay off the credit card with an APR of 20% first, because that’s the one that will cost you the most over the long run due to compound interest. Once you eliminate the balance with the highest interest rate, you’d move on to the balance with the next highest interest rate (the $5,000 balance with the 15% APR), until all your balances are paid off.

Which method is for you?

So, which approach is better? Famous money person Dave Ramsey swears by the snowballing method because most people have trouble motivating themselves to pay off their debt. Starting out with “quick wins” by eliminating small balances first can get you energized to pay off the rest of your debt. For Ramsey, paying off debt isn’t a question of math — not which method will save you the most money in the long run — but a question of behavior. If you’re the sort of person who needs a lot of motivation to get rid of your debt, snowballing is probably the best method for you. Attack those small balances, and feel good about the steps you’re taking to be debt-free.

But if you’re the sort of person who’s already motivated to pay off your debt, you should definitely go with the avalanche approach. High interest rates on credit cards compound quickly and can keep you in debt for a very long time, so it’s a good idea to focus on those balances first. If you have student loan debt, consider the following: Unlike the interest accumulated on credit cards, you can actually deduct up to $2,500 worth of qualified student loan interest during tax time, which is pretty awesome. But you should still make an effort to get your student loans paid off, because unlike credit card debt, you can’t discharge your student loan debt if you ever get into really deep financial trouble and need to declare bankruptcy.

One last bit of advice: Once you’ve paid off your balance, make sure it stays paid off. Cut up your credit card, or close your account (yes, your credit score will be slightly affected, but who cares — you’re getting yourself debt-free. Just keep the one credit card you’ve had the longest to maintain a good credit score, and get rid of the rest of ‘em). Also, don’t do that thing where you open up new credit cards and transfer balances to get a lower interest rate, because you’ll have more credit cards open, which means you might be enticed to charge money on those cards.

Have your own magic method of eliminating debt? Let me know about it.

Photo Credit: Flickr/MissMessie/Dawn

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