Debt avalanche vs snowball, and how to pick one

The debt avalanche and the debt snowball work the same way with one difference. Both pay the minimum on every debt and send all your extra money to one target debt. When that debt is gone, its payment rolls into the next one.

The difference is how you pick the target. The avalanche goes after the highest interest rate. The snowball goes after the smallest balance.

How the debt avalanche works

1. List your debts by interest rate, highest first.
2. Pay the minimum on every debt.
3. Send all your extra money to the debt with the highest rate.
4. When it's paid off, add its old payment to your extra money and move to the next highest rate.

The avalanche pays the least total interest, because the most expensive balance shrinks first. The catch is that the highest-rate debt may also be a big one, so your first payoff can take a while.

How the debt snowball works

1. List your debts by balance, smallest first.
2. Pay the minimum on every debt.
3. Send all your extra money to the smallest balance.
4. When it's paid off, add its old payment to your extra money and move to the next smallest.

The snowball usually costs more in interest than the avalanche. In return, you close accounts sooner. Each closed account means one less bill and one more minimum payment you can roll forward. Dave Ramsey made this method well known. It's Baby Step 2 in his plan, and his company also makes the EveryDollar budgeting app. If you've used EveryDollar and want something different, here are some EveryDollar alternatives.

A worked example

Say you have three debts:

You're paid twice a month and can send $125 extra from each paycheck, so $250 a month on top of the minimums.

The avalanche targets Card A first, because it has the highest rate. The snowball targets the personal loan first, because it has the smallest balance.

In this example the avalanche saves about $310 and one month. The snowball closes its first account eight months sooner.

These numbers come from a simple month-by-month calculation with fixed minimums. Your lenders' math will differ a little. The wider the gap between your interest rates, the more the avalanche saves. When your rates are close, the two methods end up close too.

What the research says about the snowball

The argument for the snowball is about sticking with the plan. A 2012 paper by David Gal and Blakeley McShane in the Journal of Marketing Research, Can Small Victories Help Win the War?, looked at people working through a debt settlement program. They found that closing accounts predicted getting out of debt, whatever the dollar balance of the accounts closed. Once they accounted for the share of accounts closed, the dollar balance of those accounts didn't predict it.

That doesn't mean the snowball is better for everyone. It means paying off whole accounts may help some people keep going.

Which one should you pick?

Pick the avalanche if:

• Your interest rates are far apart.
• Your highest-rate debt isn't much bigger than the others.
• You'll stick with a plan without early wins.

Pick the snowball if:

• You have a few small balances you can clear in a few months.
• You've started a debt plan before and quit.
• Your rates are close, so the extra interest is small.

Whichever you pick, pick the one you'll keep doing until the last debt is gone.

Combining the two

You don't have to use one method from start to finish.

• Clear one or two tiny balances first for a quick win, then switch to the avalanche.
• Use the snowball, but move any very high-rate debt, like a payday loan or a cash advance, to the front.
• If a 0% promotional rate is about to end, target that balance before the regular rate starts.

Leave your mortgage out of either list. Student loans with low fixed rates can usually stay on their regular schedule too.

Running it from each paycheck

Debt plans are usually written as monthly amounts. If you're paid weekly or every other week, set your extra payment per paycheck instead.

1. Assign each minimum to the paycheck that lands before its due date, and put it on autopay.
2. After bills and everyday spending, decide what share of what's left of each paycheck goes to the target debt.
3. Send it on payday. Some paychecks carry rent and have nothing extra. That's fine.
4. When a debt is paid off, add its old minimum to the extra payment on the same paycheck.

Before you go hard on either method, keep a small emergency fund so a surprise doesn't go back on a card. Here's how to decide between an emergency fund or paying off debt first.

Tracking it

A spreadsheet with one row per debt and one column per month works. An app saves you the math.

Budgey is a budget app built around paydays. Your budget period runs from payday to the day before the next payday. Each card or loan can be a debt payoff goal with its real interest rate, and you log what you send to it each period. Core is $5/mo or $20/yr with live sync for 1 bank. Plus is $10/mo or $100/yr for 2 or more banks or budgets.

If you're comparing apps, here's Budgey vs PocketGuard and a list of PocketGuard alternatives.

Both methods sit inside a larger budget. Here's how the main budgeting methods compare.

FAQ

Which saves more money, the avalanche or the snowball?
The avalanche, because it pays down the highest interest rate first. How much more depends on how far apart your rates are.

Is the snowball method a mistake?
No. It costs more in interest, but you close accounts sooner. If that keeps you going, it can be the better choice for you.

Can I switch methods partway through?
Yes. Switch on a payday, and send the next extra payment to the new target.

What if my smallest debt also has the highest rate?
Then both methods target it first, so start there.