What is the Best Way to Eliminate Debt? Snowball vs. Avalanche

Inside: The debt snowball method and the debt avalanche method are the two best and most popular ways to eliminate debt quickly. Find out which one will work best for you.

Do you remember watching cartoons where there is a small snowball rolling down a hill, then it quickly gets bigger and bigger and finally swallows up the bad guy?

Or how about the character standing at the bottom of a cliff only to be taken out by an avalanche of snow?

Those scenes pretty much describe the snowball and avalanche methods of eliminating debt. But which one is the best way to eliminate debt?

Debt snowball

With the debt snowball, you start with your small debts, rollover payments to the next bill, and soon you are making huge extra payments to your largest debts while staying within the same monthly budget.

It is a very simple and effective method of eliminating debt, which is why the debt snowball is so popular. Exactly how does it work?

List your debts

First, you want to get a sheet of paper or spreadsheet and make a list of all your debts, with type, balance and minimum payment and interest charged. List them from smallest balance to largest. For the snowball method, we are going to ignore the amount of interest each charges.

Here is an example we’ll work with

In this example there are $718 in minimum payments each month. This comes to

Total principal & interest: $63501
Total Interest: $14791
10 yrs to debt free

Ouch.

Focus on one debt at a time

Next, you are going to look at your budget and find any extra money you can put towards extra payments. You are going to pay the minimum payment on all the debts except the smallest one. All the extra money for the month will go towards extra payments on the smallest debt on your list.

Let’s say you manage to budget in an extra $300 per month to go towards your debts. In the example, that means $1018 each month going towards debt payments. In this case, CC #1 will get $28 + $300 for its payment ($328 total) and the remaining debts get their minimum payments.

Roll payments into the next debt

After 3 months, credit card #1 is done. You then cross it off the list and apply the $328 that was going towards credit card #1 and apply it to credit card #2. This card now has a monthly payment of $328+$121 = $449. After another 7 months, credit card #2 is done. Boom! Oh, yeah! (as my daughter would say)

You keep rolling the payments to the next debt on the list. Another year later, the car is paid off. And in less than 5 years total? Yup, you guessed it. That student loan is gone!

When using the snowball method, you have paid

Total principal & interest: $56132
Total Interest: $7420
Years until debt free: 4.7 years (56 months)

Awesome!

Is this the best way to eliminate debt?

Is the debt snowball the best way to eliminate debt? Strictly speaking, probably not. But maybe.

Huh?

There are other approaches that may help you save money on interest and could also shorten the payoff timeframe. The snowball method, however, provides a huge psychological boost. It is easy to get excited as you see the progress made as you go from 4 accounts quickly down to 3 and then when you have just 2 left? Happy dance. And there are fewer payments to juggle as well.

The short-term wins are also very encouraging. If this is what will motivate you more than having accounts open longer but paying less interest, then the debt snowball method is for you.

But there is another method that usually will help pay down debt even faster and save you money on interest payments. That, my friend, is the debt avalanche.

Debt avalanche

The debt avalanche, which is sometimes called “debt stacking”, usually is the best way to eliminate debt if you are strictly looking at numbers.

With the debt avalanche, you sort your accounts so you start paying down with the account that has the highest interest rate. Your new list looks like this:

This means you will almost always save money on interest and reduce the amount of time you are making payments. However, it may mean some of your accounts are open longer.

Using the above accounts as the example again, with the avalanche method you end up paying

Total principal & interest:  $55667
Total Interest: $6964
Years until debt free: 4.6 years (55 months)
and you save $465 and 1 month over snowball in this case

This is just one example. You will want to plug in your numbers because you might save thousands of dollars more with the avalanche method. Or your savings could total $5.

Which method should I use?

If you are strictly a numbers person and don’t mind juggling payments on multiple accounts knowing that you’ll come out ahead in the end, then the avalanche method is the best way to eliminate debt for you.

If you need the mental boost and encouragement that the snowball method provides, then stick with that.

Either way, you are crushing that debt.

Are you ready to get started?

You can write things down on paper or set up a spreadsheet. But I did find a great calculator that you can use for free at Undebt.it . You can plug in your numbers and see what happens if you apply the snowball or the avalanche method.

Whichever way you choose to eliminate your debt, an ever growing snowball or by way of an avalanche, your debt can be conquered.

What tools would help you keep track of paying down your debt? What is your best way to eliminate debt?

Pssst…also check out the debt blizzard!