In the table above, the actions that are the same in both the snowball and avalanche strategies appear in green. The steps that are different appear in red. As you can see, the two strategies have a lot in common.
Both methods are based on organization, extra payments, rolling the payments from one debt into the next as soon as it’s paid off, and always making all your minimum payments to stay in good standing with your creditors.
The main difference between the two methods is the specific debt that is repaid first.
- The snowball strategy targets smaller debts first - this creates a strong sense of progress because you’ll be able to strike a few debts off your list in the first few months.
- The avalanche method focuses on clearing the debt with the highest APR first - this makes excellent financial sense because it lets you pay your way through the interest faster and pay less overall.
Both methods have their share of benefits and drawbacks - but they produce excellent results. Let’s compare them in more detail.
So Which Way is Better?
Overall, the decision comes down to your personality, way of thinking, and relationship with money.
Let’s say you have the following debts outstanding and $600 a month to repay them:
- $2500 in credit card debt at 6% (minimum payment: $100)
- $3000 in personal loan debt at 5% (minimum payment: $125)
- $4000 in auto loan debt at 8% (minimum payment: $125)
The snowball method will have you pay your minimum payments each month and commit your extra income to pay off the credit card loan, followed by the personal loan and finally the auto loan.
The avalanche method will first focus on the high APR auto loan first, followed by the credit card loan and finally the personal loan.
While both approaches could have you debt-free in 28 months, the avalanche method will save you a small amount in interest payments - but only if you follow it regularly and don’t stop making payments.
The major advantage of using the snowball payment method is psychological. By paying off small debts first, you’ll experience positive feelings and feel motivated, striking off your debts one by one.
Since most financial decisions involve certain levels of emotion, the snowball method is more likely to be successful for the majority of people looking to reduce their debt.
Bottom Line
Both methods are powerful debt reduction strategies that can help you pay off your debts and achieve financial freedom.
When choosing between these two methods, you’ll need to ask yourself whether constant motivation from small wins is more important than long term savings on interest.
The most important thing is choosing the method that works for you, staying on course, and eliminating your debts for good.
