Debt Snowball vs. Debt Avalanche: Which Is Better?
Paying off debt sounds straightforward: spend less, make payments, and watch your balances decline.
But if you have a mortgage, student loans, credit cards, a car loan, or other debt, which one should you pay off first?
Two popular approaches are the debt snowball and debt avalanche methods:
- The snowball focuses on paying off your smallest balance first.
- The avalanche targets the debt with the highest interest rate.
Mathematically, the avalanche method will generally cost you less in interest if you follow the plan consistently. But personal finance isn’t based on math alone. If knocking out a small balance motivates you to stick with your plan, the snowball method may work better for you.
And there’s another consideration: Should every extra dollar go toward reducing your debt? These are the types of questions that our Boston financial planners can assist you with as we look at all aspects of your financial situation. Your repayment strategy should also consider your cash reserves, retirement savings, taxes, interest rates, employer benefits, and short- and long-term goals.
Read our latest Quick Guide: What Financial Planning Should You Do This Fall?
What Is the Debt Snowball Method?
The debt snowball method pays off debts from smallest to largest balance, regardless of interest rates. Once the smallest debt is eliminated, you apply its payment to the next-smallest balance.
Think of it like rolling a snowball downhill. Each debt you eliminate adds another payment to the amount available for the next one. Here’s an example:
Using the snowball method, you would make the required payments on all four debts while directing extra money toward the $2,000 credit card balance. Once that card is paid off, its payment gets added to the amount you’re paying toward the $12,000 auto loan.
What Are the Pros and Cons of the Debt Snowball Method?
The biggest advantage of the snowball method is that you can potentially eliminate individual debts sooner.
If you have eight outstanding balances and can eliminate two relatively small debts within several months, suddenly you have six. That progress can make your goal feel more manageable.
The potential benefits include:
- Quick wins that can reinforce your repayment habit
- Fewer outstanding balances as smaller debts disappear
- A straightforward system that’s relatively easy to follow
- Increasing payment amounts as each balance is eliminated
The tradeoff is financial efficiency. Your smallest debt isn’t necessarily your most expensive debt. If you’re paying down a $3,000 loan at 6% while carrying $15,000 on a credit card at 25%, the higher-rate balance continues accumulating substantial interest.
Check out our Quick Guide: “Comprehensive Financial Planning in Danvers, MA.”
What Is the Debt Avalanche Method?
The debt avalanche method prioritizes debts by interest rate rather than balance. You make required payments on every debt while directing extra money toward the debt with the highest interest rate.
Using the same example, your repayment order would change:
- Credit Card B — 24%
- Credit Card A — 18%
- Auto Loan — 7%
- Student Loan — 5%
The avalanche method attacks your most expensive debt first.
If you think of interest as a leak in a bucket, the avalanche method attempts to plug the biggest leak first. That can reduce the amount of money lost to interest over time.
For that reason, the debt avalanche method generally provides greater interest savings than the debt snowball method, assuming you make the same payments and remain committed to the strategy.
What Are the Pros and Cons of the Debt Avalanche Method?
The debt avalanche method puts the math first.
By directing extra payments toward your highest-rate debt, you’re attacking the balance that generally costs you the most for every dollar borrowed.
Potential advantages include paying less interest and becoming debt-free sooner than with the snowball method, assuming identical payment amounts.
But the avalanche approach can test your patience.
Imagine your highest-rate credit card has a $20,000 balance, while another account has only $1,500 remaining. It could take months before you completely eliminate that first $20,000 debt.
Your spreadsheet may tell you you’re making the financially efficient choice, but emotionally, you may feel like you’re getting nowhere.
That’s where behavior matters. At Sherr Financial Associates (SFA), we believe in the importance of behavioral finance to help you make objective, rational decisions rather than emotion-based ones.
Read our new blog: “What 7 Financial Moves Should You Make Before Year-End?”
When Can Motivation Matter More Than Interest Savings?
A repayment strategy only helps if you can stick with it.
Suppose the avalanche method could save you money, but after six months without eliminating an account, you become discouraged and stop making extra payments.
The mathematically superior strategy didn’t work very well in practice.
Conversely, eliminating a $1,000 balance might give you enough momentum to tackle the next debt more aggressively.
That’s why choosing between the debt snowball vs. debt avalanche shouldn’t be based solely on a calculator. Ask yourself how you’ve handled financial goals in the past.
- Do visible milestones motivate you? The snowball may be worth considering.
- Do you prefer knowing that every extra dollar is going toward your most expensive debt? The avalanche may make more sense.
You can also use a hybrid approach, such as eliminating one or two small debts before focusing on the highest-interest balances.
Should You Pay Off High-Interest or Low-Interest Debt First?
Not all debt deserves the same response.
A credit card charging more than 20% and a mortgage carrying a much lower fixed rate are both debts, but their impact on your finances can be very different.
Before making additional payments, consider:
- The interest rate and whether it is fixed or variable
- Whether the interest may be tax-deductible
- How much cash do you have available for emergencies
- Whether you’re receiving an employer retirement-plan match
- Your retirement timeline
- Other major expenses that may be expected in the next several years
This is where our financial planning services in Boston can be of benefit. We can help you develop a debt management plan that also accounts for funds you may need for retirement, taxes, college costs, housing, or other goals.
Should You Pay Off Debt or Save for Retirement?
Often, the answer isn’t “one or the other.”
Imagine you’re contributing nothing to your 401(k) so you can make extra payments on a low-interest loan. If your employer offers a matching contribution, you may be giving up valuable compensation to eliminate relatively inexpensive debt faster.
On the other hand, aggressively investing while carrying substantial credit card debt at a very high interest rate changes the calculation.
At SFA, we can help you compare questions such as:
- Are you contributing enough to receive your full employer match?
- How expensive is your debt?
- How many years do you have until retirement?
- Do you have adequate emergency savings?
- Are you behind on retirement contributions?
- How would additional debt payments affect your monthly cash flow?
If you’re approaching retirement, these decisions can become even more important. Entering retirement with substantial monthly debt payments can increase the amount of income you’ll need from Social Security, pensions, savings, and investment accounts.
The goal isn’t necessarily to retire with zero debt at any cost. It’s to understand how your debt affects the rest of your retirement plan.
Read: “Why You Should Revisit Your Wealth Plan in Retirement.”
Should You Use Savings to Pay Off Debt?
It depends on what those savings are for. Draining your emergency fund to pay off a credit card could leave you debt-free temporarily. But what happens when your furnace fails, your car needs a major repair, or you receive an unexpected medical bill?
Without available cash, you could end up putting the expense right back on the card.
Similarly, withdrawing money from a retirement account to eliminate debt can create taxes and, depending on your age and circumstances, possible penalties. You also lose money that otherwise could remain invested for retirement.
Before moving a large amount of savings toward debt, consider what those dollars are currently doing.
How Can SFA Help You Build a Debt Management Plan?
The snowball and avalanche methods can tell you which debt to pay first. But they don’t tell you how much you should put toward debt, whether you should invest at the same time, or how aggressive repayment could affect your other financial goals.
That’s where a broader debt management and financial plan can help.
At Sherr Financial Associates (SFA), we start by looking at what you owe, the interest rate, and the terms of each debt, your monthly cash flow, available savings, retirement contributions, and the other goals competing for your money.
The result isn’t simply a list of debts ranked from first to last. It’s a debt management strategy that integrates with your cash flow, retirement planning, investments, taxes, emergency reserves, and other financial priorities. Schedule a call with our Boston area financial planners today.
Frequently Asked Questions About Paying Off Debt
Is the debt snowball or debt avalanche better?
The debt avalanche is generally more efficient for reducing interest costs because it prioritizes your highest-interest debt. The snowball prioritizes smaller balances, which may provide faster psychological wins. Which is better for you depends partly on your interest rates, balances, available cash flow, and ability to stay committed.
What debt should I pay off first?
High-interest debt, such as credit card balances, often warrants priority due to its borrowing costs. However, your decision should also consider emergency savings, retirement contributions, employer matching benefits, taxes, and the terms of each debt.
Should I pay off credit cards or save for retirement?
You may not have to choose exclusively between the two. For example, you might contribute enough to receive an employer retirement-plan match while directing additional cash toward high-interest credit card debt. Your appropriate balance depends on your debt costs, retirement timeline, savings, and cash flow.
Is it better to pay off small debts first?
Paying off small debts first can be helpful if quick progress keeps you motivated. However, if your small balances carry low interest rates while larger debts have significantly higher rates, the snowball method may result in more interest expense than the avalanche approach.
Can I combine the debt snowball and avalanche methods?
Yes. You could use a hybrid strategy by eliminating one or two small balances to build early momentum, then shifting extra payments toward your highest-interest debt. What matters is having a repayment structure you can consistently follow.
Should I pay off all my debt before investing?
Not necessarily. The answer can depend on the type and cost of your debt, employer retirement benefits, emergency savings, age, retirement timeline, and investment goals. Carrying high-interest credit card debt is different from having a low-rate mortgage or student loan.
Should I be debt-free before I retire?
Being debt-free can reduce the amount of monthly income you need in retirement, but eliminating every debt before retirement isn’t automatically the right decision. A Boston financial planner can help you compare interest rates, available assets, taxes, expected retirement income, liquidity, and other priorities before accelerating repayment.
Neither Commonwealth Financial Network® nor Sherr Financial Associates provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
