When factoring in mortgage loans, home equity credit lines, car loans, credit card debt, student loans and other various personal loans, the average American is in debt for $51,900. 

This amount of debt can be a staggering amount to ever eliminate on its own, but when coupled with interest payments, it can be almost insurmountable for a majority of people. 

However, there are many various tools and resources available to anyone hoping to pay off and eventually eliminate debt. Two of these methods are the debt avalanche and the debt snowball. 

While sounding similar, there are actually quite a few differences in their definitions.

What is Debt Avalanche?

The debt avalanche, alternatively known as debt stacking, is the action of paying off debts in the order starting from highest interest rate to the lowest, and disregarding the balance. 

The idea here is to try to eliminate as much interest payment as possible. 

The first step is to set a budget of meeting at least the minimum payment on each various loan or debt for each month. From there any extra money would go directly into the account with the highest interest rate regardless of the balance remaining. 

For example: let’s say a person has a car loan of $3,000 with an interest rate of 4%, a credit card debt of $750 with an interest rate of 12% and a student loan of $10,000 with an interest rate of 17%. Using the debt avalanche method, because the student loan has the highest interest rate, it would receive any extra money leftover after the minimum payments were met each month. 

Even though the credit card balance is much lower and could be paid off faster, the debt avalanche method dictates that the interest accruing on the student loan is much more worthy of attention than closing out the much smaller credit card loan because the interest rate is smaller and therefore the faster the student loan is closed than the more money would be saved in the long run.

The 4 Steps of the Debt Avalanche Strategy

  1. List all outstanding debts and loans with balance and interest rates. Place the debt with the highest interest rate at the top of the list regardless of balance.
  2. Create a monthly budget factoring in the minimum monthly payment for each debt. Whatever extra money (say it’s $250 a month) that can go towards paying the debts down will go towards the debt at the highest on the list with the biggest interest rate.
  3. Depending on how large the loan with the most interest is this process may take a substantial amount of time. However long it may take eventually the debt will be cleared. From there, take that top debt’s minimum payment and combine it with the extra budgeted monthly payment (the $250) and use that amount to start paying down the next-highest interest debt. 
  4. Continue this method month after month moving down the list and adding up all the previous monthly minimum payments and focusing them on the next debt on the list until they are all cleared.

What is Debt Snowball?

Debt snowball is very similar to debt avalanche but with the key difference of focusing on the balance remaining instead of the interest rate attached. 

This method ultimately will cost the borrower a little more money but has been found to be quite effective at building momentum to pay off debts in the long term. Debt avalanche will save money in the long term but it takes a tremendous amount of discipline to focus on paying several different bills at a time and often not eliminating any of the for long stretches. 

The snowball is much better at helping the borrower stay focused and continuing to put money towards debts. 

Let’s again use the example above with the car loan of $3,000 and interest rate of 4%, credit card debt of $750 with 12% interest rate and student loan of $10,000 with an interest rate of 17%. The debt avalanche had the borrower focusing on paying off the student loan first because of the high interest rate, but the debt snowball would start with the lowest balance instead. 

So, this method would suggest paying off the $750 credit card first, then shifting towards the car loan, and then focusing on the student loan last. This will close out more outstanding debts faster but it will ultimately cost more money over time as the student loan will be open the longest and with the highest interest rate, would certainly accumulate much more debt before it’s eliminated. 

Debt snowball is the more expensive option but the momentum gained from paying off debts and closing them could be worth the extra money it costs. 

The 5 Steps of Debt Snowball Strategy

  1. Make a list of all owed debts and loans, ranking them from smallest balance at the top to largest balance at the bottom.
  2. To the right of each balance write down the minimum monthly payment due on each and add up the total. This number will be the absolute minimum that must be paid every month and therefore must be budgeted first. 
  3. Every month make the minimum payment on each balance and add whatever extra money in the budget (let’s say $100) to the smallest balance at the top of the list. Preferably this extra money will be added into the budget and made every month alongside the minimum payments.
  4. Continue this method until eventually the smallest balance is paid off. From here add the amount of the minimum payment for the now closed balance plus the extra money (the $100 example) to the second smallest balance, alongside maintaining the minimum payment on the other balances.
  5. After finishing off the second smallest balance add the money that was going towards that one (the previous two minimum payments plus the $100 extra) to the third smallest loan. Continue this process until all debts are cleared and eliminated.

Alternative Options To Avalanche and Snowball

The debate over which is superior between the debt avalanche and debt snowball methods will continue on with proponents of both making strong cases. 

However, sometimes neither of these options is the best for an individual based on their specific finances. While these methods have been proven to work, they can take quite a while to chip away, especially with more accounts open and more debt in total. 

Depending on how high an interest rate is, paying the monthly minimum amount may not do much to help lower the debt at all. Depending on the details of an individual’s finances, some alternative solutions may work better.

Debt Consolidation Loan

Debt consolidation is essentially rolling up multiple loans and debts into one giant account. The intention is mostly for ease of payments but also can help with interest rates. 

Depending on the type of loan taken, the interest rate may be lower than several, if not all, of the existing debts, and could quite possibly be paid sooner than using either the avalanche or snowball methods.

Debt Management

This method would involve bringing in an outside credit counselor company in order to work with the credit card companies to reduce the interest rate on the debts owed. This plan would come with a fee going toward the credit counselor company but could ultimately still save money in the long run. 

The credit counselors would be able to better negotiate rates and minimum payments and also generally set up a time limit for repayment typically lasting around 60 months.

The Takeaway: Debt avalanche has you pay down the highest-interest debts first and can save you some money, while debt snowball has you tackle the highest-owed debts first and can give you some motivation.

Ultimately, the goal of both methods of debt avalanche and debt snowball is to pay off the outstanding debts owed.

 At the end of the day both methods are perfectly acceptable and have been definitively proven to work quite effectively. It’s up to each individual which method would better suit them. 

Debt avalanche will ultimately help money to be saved over the course of payments but debt snowball has been shown to provide much more motivation in terms of sticking with the payment plans. 

Depending on the person, it’s up to them to decide which option is superior for their own finances. Whichever path chosen, the most important part is to continue making payments and trust in the plan.

Sources:

https://www.businessinsider.com/personal-finance/average-american-debt#:~:text=The%20average%20American%20debt%20totals,to%20cost%20of%20living%20variations.

https://www.consumerismcommentary.com/the-correct-way-to-pay-off-personal-debt-the-debt-avalanche/

https://www.debt.org/advice/debt-snowball-method-how-it-works/