The Debt Snowball and Debt Avalanche Strategies

Posted on: January 16, 2015

Written By: Pauline Paquin

You may be the victim of debt fatigue, where you are making minimum payments on your debt and are tempted to give up because it is such a long and tedious process. It feels like you will never see the end of it. So today we will talk about two concepts that may help you keep your eyes on the ultimate goal of debt freedom: the Debt Snowball and Debt Avalanche strategies. These two methods are ways to help you build momentum and pay off your debt faster.


The Debt Snowball

The Debt Snowball is the most simplistic concept of the two. It suggests you list all your debts by outstanding amount. For example

  • Debt 1, credit card, £1,500 at 19.99%. Minimum payment £30 per month.
  • Debt 2, student loan, £3,500 at 6.5%. Minimum payment £70 per month.
  • Debt 3, home improvement loan, £15,000 at 12.9%. Minimum payment £300 per month.

So at the moment, you are paying £400 each month to repay your debts. The Debt Snowball strategy consists of putting any extra money you may have towards your smallest debt – in this case the £1,500 credit card balance. We talked previously about ways to make extra money by selling your things, getting extra work, freelancing… and not spending your existing paycheque. It should all go towards debt 1, while you keep on making the minimum payment for debt 2 and 3. Getting rid of £1,500 of debt is surely easier than repaying £15,000, so the idea behind the Debt Snowball is that once your smallest debt is paid off, you will feel good and tackle the second biggest one with more energy. Once debt 1 is repaid, you should put the minimum payment of £30 a month you used to make towards debt 2.

The main advantage of the Debt Snowball strategy is that if you have several small balances, like 4 credit cards, it builds up your confidence and motivates you to see them go away one by one, instead of slowly paying them all off.


The Debt Avalanche


The Debt Avalanche offers a similar strategy that slowly grows and grows until it knocks down all of your debt, except that instead of listing your balances by growing outstanding balance, you should list them by decreasing interest rate. With the same figures as before, it would go like this:

  • Debt 1, credit card, £1,500 at 19.99%. Minimum payment £30 per month.
  • Debt 3, home improvement loan, £15,000 at 12.9%. Minimum payment £300 per month.
  • Debt 2, student loan, £3,500 at 6.5%. Minimum payment £70 per month.

Debt 1 still should be repaid first, because it has the highest interest rate. This is the most expensive money you have borrowed. So in order to pay less interest overall, the Debt Avalanche strategy suggests you should pay that debt first. Then tackle the 12.9% loan, and finally, the 6.5% loan.

It minimizes the money you will have to pay back to your lenders, but if your most expensive debt carries a huge balance, you may be prone to debt fatigue if your pay off debt is months from now, and tempted to drop your efforts altogether.

While the Debt Avalanche makes more sense financially, if your smallest debt comes with a low interest rate, it may help you get the necessary motivation to tackle the other debts if you repay that one first, and then get on Debt Avalanche mode. Like a diet, paying off debt requires discipline and strong will, so any strategy to trick your mind into staying focused and motivated is great to implement.


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