Understanding Debt Snowball and Debt Avalanche

If you're overwhelmed by multiple debts, two popular strategies can help you tackle them effectively: the debt snowball and the debt avalanche methods. Both involve making more than the minimum payments on your debts, but they differ in the order you pay them off.

Debt Snowball Method

This method focuses on paying off your smallest debt balances first, regardless of interest rates. The idea is to gain quick wins, which can boost motivation and momentum.

Debt Avalanche Method

The avalanche method targets debts with the highest interest rates first, minimizing the total interest you pay over time and potentially saving you money.

Comparing Both Methods with an Example

Let's say you have three debts:

• Credit Card A: $1,000 balance at 18% interest
• Credit Card B: $5,000 balance at 12% interest
• Personal Loan: $10,000 balance at 6% interest

Your monthly budget allows $1,000 to put toward debt repayment. Minimum payments are $50 for Credit Card A, $150 for Credit Card B, and $200 for the Personal Loan.

How Payments Would Work

With either method, you make minimum payments on all debts except the focus debt, where you put the rest of your $1,000 budget.

1. Debt Snowball: Pay $50 + extra on Credit Card A until paid off, then roll that payment into Credit Card B, and so on.
2. Debt Avalanche: Pay $50 + extra on Credit Card A (highest interest), then move to Credit Card B, then Personal Loan.

Which Method Is Right for You?

Choosing the right method depends on your personality, financial goals, and motivation style.

• Choose Debt Snowball if: You need psychological wins to stay motivated, or you find it difficult to stick to long-term plans without seeing quick progress.
• Choose Debt Avalanche if: You want to minimize the total interest paid and are comfortable focusing on long-term savings over immediate gratification.

5-Minute Action Today

Take these quick steps to start your debt payoff journey:

1. List all your debts with balances, interest rates, and minimum payments.
2. Decide which method aligns best with your motivation and goals.
3. Set a realistic monthly payment budget above your total minimum payments.
4. Choose your first debt to target based on the method.
5. Schedule automatic payments to avoid missed due dates.

Common Mistake to Avoid

Ignoring your budget constraints. Many people pick a payoff method without realistically assessing how much they can allocate monthly. This can lead to missed payments, increased debt, or burnout. Make sure your payments are sustainable and adjust other spending habits if needed.

Read Next

• How to Create a Monthly Budget That Supports Debt Repayment
• Emergency Funds: Why You Need One Before Aggressively Paying Debt
• Credit Card Balance Transfers: Pros and Cons for Debt Management