Debt Snowball Method vs. Debt Avalanche Method

• The debt snowball and debt avalanche methods are two common approaches to paying off debt.
• The debt snowball method targets the smallest debt first, so you see progress quickly.
• The debt avalanche method targets the highest interest debt, which saves money on interest and facilitates faster repayment overall. 

Paying off debt is no easy task — and any debt management plan requires committing a portion of your monthly income to paying down your debts. However, having a debt repayment plan in place can help you work toward your goal of living life debt-free, at which point you could put your money toward other personal finance goals.

The debt snowball method and the debt avalanche method are two common strategies for paying off debt. Both methods can help you pay your debt in full, but each one has distinct advantages. Here, we’ll outline how each method works, with examples of how debt repayment may look in practice. 

Differences between the debt snowball method and the debt avalanche method

The biggest difference between the debt snowball method and the debt avalanche method is which debt you target to pay off first. Both methods have their advantages, but you may prefer one over the other.

Once you understand the basics, getting to know the details about the snowball method may help you decide if it’s the right choice for you.

How the debt snowball method works

The debt snowball method is a popular debt repayment method that targets the smallest debt for repayment first. The debt snowball method follows these steps, in order:

1. Paying the minimum monthly payment on all debts so your accounts remain in good standing
2. Allocating any leftover money to the debt with the smallest balance
3. As you payoff one loan, you now have the amount of that former payment plus the extra cash flow you already had in your life to allocate to the next debt
4. Continuing until all debts are paid in full

Following the debt snowball method may help you stay motivated. Because you begin with the smallest debt, you will see progress relatively quickly. Here’s how it may look in practice.

Debt snowball method example

Following the snowball method begins with listing each of your debts — including personal loans, auto loans, credit card debt and student loans — and recording the balance on each, as well as the total amount of money you can allocate to debt repayment each month.

Let’s say someone has a debt repayment budget of $2,500 monthly, and the following debts:

Using the snowball method, the borrower would spend $1,390 paying the minimum balance on each debt and allocate the remaining $1,110 to paying off the smallest debt — in this example, their personal loan. 

In month two, they will have repaid the personal loan and can begin allocating money to their credit card balance, their next-smallest debt. In another seven months, they will have repaid their credit card debt and can begin tackling their auto loan. In a little over 1.5 years, they will have repaid their personal loan, credit card debt and auto loan, and have just the student loan remaining. All debts will be paid off in four years, and the borrower would pay about $13,300 in interest during that time. 

Because the snowball method tackles the smallest debt first, you can make significant progress within a short time span. This can make debt repayment feel rewarding, and keep you motivated to continue.

The other added benefit to this method is that you will have a larger amount of free cash flow in case something in your life goes awry and they have a surprise expense. This would take away from paying their debt down as quickly as possible per the above scenario, but it would also prevent you from needing to take additional debt for the surprise expense.

How the debt avalanche method works

The debt avalanche method also focuses on one debt at a time. However, with the avalanche method, you target the highest-interest debt first. The debt avalanche payment follows these steps:

1. Paying the minimum balance on all your debts
2. Allocating any leftover money to repay the debt with the highest interest rate
3. As you payoff one loan, you now have the amount of that former payment plus the extra cash flow you already had in your life to allocate to the next debt
4. Continuing until all debts are repaid in full

Here’s how the method looks in practice. 

Debt avalanche method example

Similar to the snowball method, following the avalanche method starts with taking an inventory of your debts, organized by interest rate.

Here’s how someone with a debt repayment budget of $2,500 might organize their debts:

Using the debt avalanche method, the borrower would use $1,390 to pay the minimum balance on each loan and allocate their remaining $1,100 to paying off their highest-interest debt — in this case, their credit card.

Within roughly six months, they will have repaid their credit card and can begin targeting their auto loan. Within a year, they will have repaid their auto loan and can begin focusing on student debt. In a little under six years, they will have repaid their student loan and can begin repaying the last debt, their personal loan. Using this method, all debts will be paid off in four years, and the borrower would pay about $13,100 in interest. 

It may take longer to see progress using the avalanche method because your highest-interest debts may also have high balances and take longer to repay, so the fixed payments do not disappear as quickly, and free cash flow remains the same during that time. However, paying the highest-interest debt first saves money in the long run, since your debt will accumulate less interest overall.

Which method is the best way to pay off debt?

Both the debt snowball and debt avalanche methods will help you repay all your debts in full. However, they have distinct advantages: 

• The debt snowball method allows you to see results more quickly since you can pay off your smallest balances in a relatively short period of time. This can provide a sense of accomplishment, and keep you motivated on your journey to living debt-free.
• Conversely, the debt avalanche method can help you save money over time. By repaying your highest-interest debts first, you minimize the amount of total interest you’ll pay during debt repayment.

A great way to decide on which method is best for you — and therefore, which debt is best targeted — is to analyze the amount of interest saved over the course of the repayment, and the time it takes to repay all the debt. In the above example, the interest saved is $300 and the loans are paid off in about six years with the avalanche method, but the debt is repaid in about four years with the snowball method. If it is more important for you to save $300 than pay your debt off two years earlier, the avalanche method is a good idea. Conversely, if repaying your debt as quickly as possible is your goal, then spending an extra $300 to do so might be worth it. This is for you to decide.

Ultimately, the method you choose depends on your priorities and financial goals, but whichever way you choose, if you follow the schedule you create, your debts will likely be paid off in four to six years. If you feel discouraged by your debt, the relatively rapid results of the debt snowball method may be best suited for you. If, however, your goal is to minimize interest paid, the debt avalanche method may be the best fit.

Keep in mind that everyone’s financial situation is different; a dedicated personal banker can walk you through your options and help you develop a debt repayment strategy that’s right for you.