The snowball method vs the avalanche method

The “snowball method” to debt repayment was made popular by Dave Ramsey. It is a four-step process.

The Snowball method

Why the snowball method works

The idea behind the snowball method is that by focusing on your smallest balance and getting that paid off quickly you gain the confidence to keep going.

Rather than paying off the loans with the smallest balance first, you pay off the loans with the highest interest rate first.

The avalanche method

If you are the kind of person where motivation isn’t an issue and your main priority is to get out of debt as quickly and efficiently as possible, the avalanche method is for you.

Why the avalanche method works

Let’s say you have the following debts.

Snowball vs Avalanche

– Credit card 1: $10,000 balance and 19% interest rate – Credit card 2: $5,000 balance and 18% interest rate – Car loan: $30,000 and 9% interest rate – Personal loan: $3,500 balance and 7% interest rate

Total debt: $48,500

You would pay your debt in the following order

If you use the snowball method

– Personal loan – Credit card 2 – Credit card 1 – Car loan

Using the snowball method, you would be debt-free in 40 months and would pay $9,755 in interest during that time.

You would pay your debt in the following order

If you use the avalanche method

– Credit card 1 – Credit card 2 – Car loan – Personal loan

Using the avalanche method, you would be debt-free in 40 months and would pay $8,908 in interest during that time.

So, which is better?

• Both the snowball method and the avalanche method would have you debt-free in 40 months.

• If you used the avalanche method you would save $847 in interest payments

Honestly, it does not matter which debt repayment you choose. Saving a few hundred dollars per year is nice but two factors are much more important than minimizing the amount of interest you pay.

1. Making sure you manage your spending to ensure you never fall back in debt 2. You pick a debt repayment strategy that you can stick to

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