You’ve got debt to pay off.  Are you starting from a negative net worth and want to get back to broke?  Do your assets outweigh your debts but you want to finally be totally debt free?  

There are several ways to pay off debt.  Having a specific plan will help get you there faster, save you money, and keep you focused along the way.  

Today we’re going to talk about two general approaches to kicking your debts, once and for all: the snowball and the avalanche.  The debt snowball and debt avalanche approaches are similar in several ways.  Either will help you get out of debt faster and cheaper, especially if the alternative is no plan at all.  

Start both by making a list of all the debts you have.  Yes, ALL of them, except your mortgage(s).  Regardless of the reason, balance, rate, or any other detail.  Write them all down.  Then list the remaining balance and interest rate for each.  

The Snowball

The debt snowball approach says to order your debts by remaining balance from smallest to largest.  

Pay the minimum balance on all debts.  Put any and all extra money you have each month towards the principal of first debt with the smallest remaining balance. Watch the balance tick down and down and down with excitement and glee until it gets to zero. Have a one-minute dance party to celebrate.  Once that debt is completely paid off, take all of the money you were putting towards that one and funnel it towards the next smallest balance debt on the list.

Rinse and repeat. Don’t forget about the dance parties.

When the first is paid off, you now have all the “extra” money you were paying towards the first debt PLUS the minimum payment of the first debt that can go towards the second one.  When the second debt is paid off, your snowball is now comprised of the extra money from your budget, the first minimum payment, and the second minimum payment.  All of that is going towards the third debt. Your dance moves are getting better by the minute. Literally.

(Don’t worry, there examples with numbers below.)

As you start paying off each debt, the snowball grows.  Each time you pay off another debt, you have a larger amount of money to put towards the next debt on the list. Soon your snowball is ginormous, you’re debt free, and you could audition to be JLo’s next backup dancer!

The Avalanche

The debt avalanche differs from the snowball in that you work on paying off your debt with the highest interest rate first.  Change the order of your list so its ordered by interest rate from largest to smallest.  

The rest is the same as you work through the list.  Pay the minimum balance on everything but the debt with the highest interest rate.  Get the debt with the highest interest rate paid off as soon as you can by plowing every extra penny you have into it.  

Once that first debt on the list is paid off, move your focus to the next highest interest rate and pummel that one.  One by one you move down the list knocking each debt out.  The avalanche comes and before you know it, the list is gone!

The difference

Strictly from a numbers perspective, the avalanche is “better” because you’ll end up paying less interest over the life of the loans.  If you pay the highest rate off first, you’ll pay less interest over time.  Makes sense, right?

The downside of the avalanche is it may take you a while to cross that first debt off the list.  Depending on how big the balance of the debt with the highest interest rate is, you might be paying on that one for a while.

The upside is you end up paying less interest and you’ll pay everything off a little bit sooner.  You cross the highest interest rate off the list.  Then take all the money you were putting towards the first payment and put it to the second.  Here comes the avalanche.

The snowball gives you your first “win” earlier.  You pay off that first debt sooner because it has a smaller starting balance.  You get to cross one of your debts that’s been haunting you off the list.  If you have several small balance loans you may knock out a few very quickly.  Suddenly your list is much shorter.

That sounds pretty satisfying and motivating, right?

You have one (or a few) less debt(s) on your list now.  You have the mental and emotional satisfaction of achieving your goals.  You’re seeing very noticeable progress.  You feel less stressed because not only do you have a solid plan, you can see that it’s working before your very eyes.

Keep marching forward.  Keep putting every extra penny you can find towards your current focus debt.  You will be debt free before you know it!

How do I pick?

If you’re a numbers person and you want to pay the least amount of total interest and get to the finish line the fastest, then go with the avalanche.  If you want or need the “small win” (paying off any debt is a huge win as far as I’m concerned) sooner to keep you going, go with the snowball.

It really comes down to a matter of preference.  At the end of the day, either plan is great.  A solid plan is fiercely better than no plan.  Making progress towards intentionally paying off debts is way better than burrying your head in the sand and doing nothing about it.

Here’s the secret

The secret about the avalanche vs the snowball is that it isn’t that much of a difference.  Allow me to demonstrate.

Let’s take a look at the Jones Family.  They have $65,000 in total debt (excluding their mortgage) broken down as follows:

The minimum payments are $1,023.00 each month.  The goal is to pay everything off as quickly as possible.  Let’s assume after they’ve found every extra penny in their budget they can, The Joneses have $1,500 to put towards their debts each month.  After the $1,023 in minimum payments, they send $477 “extra” towards their first focus debt.

With the snowball approach, Mr. & Mrs. Jones pay off each debt in the order of smallest balance to largest.  The table below shows the order of payoff, total interest paid, and time to pay off for each loan.

Pay the minimum monthly payment towards each, and the extra $477 towards credit card #1 for a total payment of $527 to card #1.  Four months later that is paid off.  They now have the $527 plus the $50 minimum payment for credit card #2 going to card #2.  The Jones Family, who used to have quite the spending problem, is already down to four debts from five and is paying $577 each month to credit card #2.  After card #2 has been kicked to the wind, they’re funneling $852 ($577 + $275) to car payment #1.  That’s a huge increase over their original $275/mo car payment!

Do you see why this is so effective?

The snowball in this particular example costs them a total of $7,352.52 in interest, and they’ll be debt free in 4 years and 1 month.

The avalanche table looks like this:

Gaining payment momentum works the same in the avalanche as with the snowball.  The order of debt payoff is the only difference.

The avalanche results in a total interest payout of $6,736.00 and debt freedom in 4 years even.  The avalanche saves The Joneses $616.52 in interest, which is not nothing.  They’ll be debt free one month sooner, too.

The snowball knocks out the first debt in four months, while the avalanche takes seven months to see that first win.  The snowball also takes their list from five to one in under three years.  With the avalanche, it takes almost the whole four years to get down to one debt, then that last car payment is knocked out in the last two months.

The bottom line

If you know you’ll stick with the plan once it’s in place, regardless of how long it takes you to cross things off your list, go with the avalanche.  It’ll save you a little bit of time and money in the long run.

If you want (or need) to see progress faster, the snowball is right for you!  Spending a few hundred extra dollars on interest or taking a month or two longer doesn’t matter if you still get to zero!  If you know the avalanche plan won’t work for you, then the snowball is much better than a plan you don’t see through!

Any plan is better than no plan, I can’t stress that enough.

I hope this shows that it’s possible!  The Joneses went from $65,000 in debt to debt free in four years!  THAT’S A BIG FREAKING DEAL!

If they had stuck with the minimum payments, each car would have taken five years to pay off and student loans would have taken 10.  Making the minimum payments on the two credit cards would have taken four and a half years and over 11 years(!!!) to pay off.  That’s assuming no additional charges are made!

The Joneses did in four years what would have taken 11 to do if they would have stuck to auto-pilot.  And, that 11 years doesn’t take into account any additional debt incurred!  This family no longer has the black cloud of debt hanging over their heads.  They have significantly more money each month to save and invest for whatever their goals may be.

Where are you?

You may be starting with more or less debt.  You may be able to put more or less “extra” money towards your debts each month.  Regardless of what exactly your current situation is, make a plan!  Get out from under it the best way you can and have fewer things to worry about each day 🙂

If you need help, ask!  This is a judgment-free zone.  If you’re feeling overwhelmed or don’t know where to start, please reach out!