Having trouble deciding which debt repayment option is right for you? Maybe you have heard the terms “debt snowball” and “debt avalanche” repayment methods being thrown around.
What are they and which one should you choose? I will go over all that in this Debt Repayment Guide: Choosing Between Debt Snowball vs Debt Avalanche.
When I graduated from grad school and looked at all my loans (check out my first debt statement to see what I started with), I was shocked, mildly angry at myself for getting into this much debt, and lastly confused. How do I even start to repay these loans I had amassed from my undergraduate and graduate studies?
Then, as I started to do my research, I came across these terms “debt snowball” and “debt avalanche” continuously. The more I searched, the more these terms came up and the more these terms came up, the more research I wanted to do. Needless to say, I was overwhelmed.
That’s why I want to create this post for all of you out there who are at the crossroads, unsure which way to go because, after weeks of researching and 9 months after graduation, I finally had the a-ha moment that really, the choice came down to ONE thing only.
I am no financial expert, I didn’t major in finance or business, and personally, I like to keep things simple. So I’m breaking this down into two steps. First, let’s familiarize ourselves with the terms. Second, we’ll dive into how to choose which debt repayment method is right for you.
Debt Snowball
I promised simple, right? So here comes my one sentence explanation of debt snowball. Debt snowball is the method of paying your loans starting from the lowest loan balance to the highest.
The term debt snowball literally makes sense when you imagine building a snowball. You start by gathering snow little by little, starting from a little ball (smallest loan balance) to making a big snowman (highest loan balance).
Let me illustrate this concept visually to simplify the concept. In my example below, I have a number of different loans with different interest rates.
If you were going with the debt snowball method, you would repay them in this order, from the smallest principle balance to the highest. Notice how I paid no attention to the interest rate or the loan type.
Debt Avalanche
Debt avalanche is the method of paying your loans starting from the highest interest rate to the lowest.
Just imagine an avalanche coming down, it starts big then dies down as it gets to the bottom of the mountain. (I have never been caught in an avalanche before, like I imagine most of you have not, so this one requires more imagination.)
To illustrate this, you can see that regardless of the amount owed, this repayment order starts from the loan with the highest interest rate to the lowest interest rate.
How to Choose Between Debt Snowball and Debt Avalanche?
It is unbelievable how divided the fields are between these two choices. Some people, like Dave Ramseyswear by the debt snowball method. Others will disregard the debt snowball method as bad math, believing the debt avalanche method is the right choice.
Choosing the debt snowball method is like tackling a war with mini victories before finally confronting the ultimate battle with the highest loan amount.
On the other hand, choosing the debt avalanche method makes more sense mathematically. You are getting rid of the debt with the highest interest rate first, therefore, limiting the accrued interest that you end up paying.
After pondering for weeks, I had my a-ha moment that choosing between debt snowball and debt avalanche really came down to one thing only. It was the ultimate battle between math vs psychology.
Do you find joy in small personal gratification? Have you been looking for motivation to repay your loans?
If you find yourself having been in debt for a while or have been discouraged once or twice in paying your loans, I highly recommend the debt snowball method.
Words cannot emphasize enough how important these psychological victories are. The hardest part of repaying debt is finding the motivation and drive to use that money that you would otherwise spend eating out or spend on shopping to repay your debt.
That is the main argument that leads people like Dave Ramsey to swear by the debt snowball. Yes, you may be paying more in the long run by having a bit more accrued interest, but that is a far better alternative than not repaying your debt at all which would lead to far more accrued interest in the long run.
Trust me when I say that the biggest motivator for me in making extra payments to pay off my loans was being able to cross out a loan when I paid it off. It was a joy like no other the first time I was able to cross out a loan from my debt statement and I look back on it every time I sense myself losing the motivation to make extra payments.
Do you hate the idea of paying loans with lower interest rates before higher ones? Are you mathematically oriented, left-side brain thinker? Are you, in general, a self-motivated and disciplined person?
If you find that you just can’t stand the idea of paying back loans with lower interest rates before higher ones first because mathematically it will lead to higher accrued interest at the end of the day, then the debt avalanche method may be the right way to go for you.
The debt avalanche method is more mathematically sound but it does require more discipline. You have to accept that you will be making many many extra payments first before you are able to see that loan fully paid off.
You may see that the number of loans you have may not be dwindling even as you continue to make extra payments which require a lot of self-motivation to continue. But know that at the end of the journey, you are saving money by focusing your efforts on higher interest rates first.
My Choice?
Personally, you know yourself best. So I won’t try to convince you that one method is better than the other. I know that some people will be curious to know which method I personally went with. I will say that I’ve tried both methods.
If you have followed my journey of debt repayment through my debt statements, you will see that I went with the debt avalanche method.
I personally think what is best for me is the debt avalanche method because I am self-motivated to pay off my debt so I don’t need the extra motivation that the debt snowball method provides. For me, the thought of paying less interest in the long run is already motivating enough.
Still undecided?
If you are still on the fence, I have one more arsenal for you. There aresome debt snowball vs debt avalanche calculators out there such as this onethat allows you to plug in your loans to compare the numbers.
I personally haven’t used it because I had made my decision by the time I found the calculator but if you are still on the fence, go ahead and see if it will help with making your decision. Good luck!
I’d love to know your thoughts in the comments! Did you go for the debt snowball or debt avalanche method?
