Snowball vs Avalanche: The Best Way to Pay Off Debt

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When you don’t have debt, your money can do anything you want it to.

Snowball and Avalanche are two popular debt repayment strategies that people employ when they want to reduce their debt. In this article, we will explain each method and how you can use it to achieve your financial goals and become debt-free.

Debt Snowball Method

The snowball method was developed by Dave Ramsey. It involves making minimum payments on ALL your debt while paying extra on the smallest first, to it out the way before tackling the larger debt. This method is the most popular debt reduction strategy and has been proven to be successful for many. The focus of this method is to build momentum in eliminating debt.

Here is a quick breakdown on how the snowball method works:

  1. Make a list of all that you owe, arranging it from the smallest to the largest.
  2. Make minimum payments on all your debt except that the smallest ones.
  3. For the smallest debts, pay as much as you can regardless of interest.
  4. Clear the smallest debts, and roll the payments to the next smallest debt balance on the list. Remember, this is in addition to the minimum payments you are already making on the debt.
  5. Repeat this until you are making large snowball payments on your largest debt.

Snowball Method Example

Let’s take Ksh 100,000, spread over four debts with varying interest. Let’s also assume we have an extra 6,000 in the budget that we make towards eliminating our debt, thus making a total payment towards the debt of 32,000 each month.

Month 1:

Mobile App: 10,000 at 24% interest (5,000 minimum payment) + 6,000

Credit Union: 20,000 at 26% interest. (6,500 minimum payment)

Credit Card: 30,000 at 18% interest. (7,000 minimum payment)

Bank Loan: 40,000 at 12% interest (7,500 minimum payment)

Total paid: 32,000

Month 2:

Mobile App: 10,000 at 24% interest (5,000 minimum payment) + 5,000 PAID OFF!

Credit Union: 20,000 at 26% interest. (6,500 minimum payment) + 5,000 debt 1 minimum payment + 6,000

Credit Card : 30,000 at 18% interest. (7,000 minimum payment)

Bank Loan: 40,000 at 12% interest (7,500 minimum payment)

Total paid: 32,000

Credit union gets paid off, in the month 2 and the process continues until the credit card and bank loan is completely paid of.

Debt Avalanche Method

On the other hand, we have the avalanche reduction strategy seeks to pay off debt with the highest interest first regardless of the outstanding balance. This approach takes on a more mathematical approach and will save you money in interest payments by targeting high-interest debt first.

Here is a quick breakdown on how the debt snowball method works:

  1. Make a list of all that you owe, arranging it based in interest from the highest to the lowest.
  2. Make minimum payments on all your debt except that the highest-interest debt.
  3. For the highest-interest debts, pay as much as you can regardless of amount.
  4. Clear the debt with the highest interest, and roll the payments to the next high-interest debt on the list. Remember, this is in addition to the minimum payments you are already making towards repaying the debt.
  5. Repeat this until you are making repayments on your low-interest debt.

Learn More: How to Overcome Debt Fatigue

Avalanche Method Example

Likewise, let’s take Ksh 100,000, spread over four debts with varying interest. Let’s also assume we have an extra 6,000 in the budget yet again that were can use towards repaying our debt. Thus, we have a total of 32,000 each month that we can use towards paying out debt.

Month 1:

Mobile App: 10,000 at 24% interest (5,000 minimum payment) + 6,000

Credit Union: 20,000 at 26% interest. (6,500 minimum payment)

Credit Card: 30,000 at 18% interest. (7,000 minimum payment)

Bank Loan: 40,000 at 12% interest (7,500 minimum payment)

Total paid: 32,000

At the end of month one, you’ll be done paying off the Mobile App loan, then move to the second-highest debt. Apply the minimum payment of Mobile App loan plus the 6,000 towards Credit Union. Do all this, while still making the minimum payments on the credit card and bank loan.

Month 2:

Mobile App: 10,000 at 24% interest (5,000 minimum payment) + 5,000 PAID OFF!

Credit Union: 20,000 at 26% interest. (6,500 minimum payment) + 5,000 debt 1 minimum payment + 6,000

Credit Card: 30,000 at 18% interest. (7,000 minimum payment)

Bank Loan: 40,000 at 12% interest (7,500 minimum payment)

Total paid: 32,000

Rinse and repeat until all your debt is pay off in full.

Learn More: How to Get Out Of Debt Successfully

The Differences: Snowball vs Avalanche

  • The avalanche strategy is the toughest because there are no visible quick wins and this now motivating to most people. The snowball method on the other hand allows you to make quick progress, thus works as a motivational program to help you continue paying off debt. If you are feeling overwhelmed by debt, the debt snowball method is the best.
  • The avalanche strategy requires more focus and discipline than the snowball strategy since its less rewarding.
  • The avalanche strategy is the most optimal method. It will save you the most amount in interest costs than the snowball method. If you let the debt with the highest interest sit too long, it will cost you a lot of time and money. So its best to attack it immediately.
  • The snowball method takes a shorter time to clear the debt as opposed to the avalanche method as you are starting from the smallest working your way to the largest debt.
  • The avalanche strategy puts you more in control of your finances. You’ll come to learn more about debt – minimum payments, interest rates and time to pay off etc.

The best way to pay off debt is neither one nor the other. These methods are both great and totally depend on the individual. The psychological aspect of the snowball method cannot be discounted. Debt can be quite daunting. Thus, the quick wins gained from the snowball strategy has helped many keep going and feel good about themselves during their journey to eliminating debt. So, if you can’t pick one or the other, consider a hybrid or opt for debt consolidation.

In the hybrid, you can first arrange the debt from the smallest to the highest, and then sort basest on the highest interest to the lowest interest. For this to work, you must have a heap of debt to tackle. While with debt consolidation, it will only be effective if your monthly payment is reduced by lowering the interest rate you pay.

Learn More: 5 Effective Ways to Get Out of Debt Quickly

Bottomline

The most important thing is that you must commit to paying off your debt. At the very least make minimum payments each month. Eliminating debt takes time and requires a lot of commitment. These tried and test strategies will only help you get there faster or reduce cost. Whatever you choose – consistency over mindset or mindset over consistency – always surround yourself with progressive thinking people that will motivate you to be the best version of yourself.

Happy Building!


Image credits: Top by Pixabay via Pexels.

Article Sources:

  1. Investopedia. ” Debt Avalanche vs Debt Snowball: What’s the Difference? , https://www.investopedia.com/articles/personal-finance/080716/debt-avalanche-vs-debt-snowball-which-best-you.asp#:~:text=The%20debt%20snowball%20method%20involves,in%20lower%20payments%20over%20time.” Accessed on 29th November 2020.
  2. Dave Ramsey. “How the Debt Snowball Method Words, https://www.daveramsey.com/blog/how-the-debt-snowball-method-works.” Accessed on 29th November 2020.
  3. Experian. ” What Is the Avalanche Method: How it Works and When to Use it, https://www.experian.com/blogs/ask-experian/what-is-the-avalanche-method/#:~:text=The%20debt%20avalanche%20method%20is,interest%20rate%20until%20it’s%20gone.” Accessed on 29th November 2020.

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Irene Makanga
Irene has an MBA in Finance and is an avid businesswoman, passionate about financial literacy.

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