Debt Paydown Cheat Sheet: Debt Snowball versus Debt Avalanche​ - The Art of FI (2024)

• S.A. FI
• September 29, 2022

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Debt Snowball

A debt snowball stacks all your debt based upon amount owed from smallest to largest. You will pay the minimum on all the debts and put all available money to pay off the debt with the smallest amount first.

Once you pay off this debt, you take all the money used to pay off the first debt and apply it all to the second debt with the smallest amount. With the money used to pay off the first debt plus the minimum amount paid on the second debt, this will speed up the paydown of the second debt. Once the second debt is paid off, then you move all the money used to pay off the second debt and move it to the third debt. This goes on until all the debts are paid off.

Pros

• You will see early success as lowest amounts are paid off first
• Psychologically fulfilling seeing “quick” wins on your debt

Cons

• Debts with the highest amounts continue to accumulate interest which can increase the overall interest payments, aka cost of debt

Debt Avalanche

A debt avalanche, like the debt snowball, will also stack your debts; however, the major difference is with a debt avalanche the debts are prioritized based upon interest rates from highest to lowest. Those with the highest interest rates are paid off first.

You will make the minimum payments to all the debts except the one with the highest interest rate. You will put all excess available money to pay off this debt, then once paid off you move all payments from the first debt to the debt with the second highest interest rate and so on until all the debts are paid off.

Pros

• Most cost effective as you will pay the least amount of interest overall since you are focusing on paying off the highest interest rates first.
• Overall quicker payoff timeline

Cons

• Can be slower to pay off first debt if the highest interest debts are one of the larger amounts

Real-Life Example

Let’s compare these two debt payoff methods using a real-life example. Scotty has an extra $1,000 per month to go toward debt after paying all living expenses including the minimum payments on the debt below:

Car Loan: $20,000 @ 5% interest
Student Loan: $50,000 @ 3% interest
Credit Card 1: $15,000 @ 20% interest
Credit Card 2: $15,000 @ 28% interest

Let’s see what happens if he makes the minimum payments on the debt using the debt snowball and debt avalanche without any extra payments per month:

When no extra payments are made, then there is very little difference between the debt avalanche and debt snowball methods. You will save a small amount in interest payments by using the debt avalanche, however.

Overall, the debt snowball and debt avalanche speed up the time to pay off all debt by 156 months (13 years) versus paying the minimums on each debt and not applying the payments from other debts to pay down the remaining debts.

What happens when Scotty applies the $1,000 to pay down debt? Let’s take a look below:

When Scotty starts applying extra payments above the minimum, then the real savings start to show. At $1,000 in extra monthly payments, the timeline to payoff is cut by almost half compared to no extra payments with the debt avalanche being paid off 4 months sooner than the debt snowball.

What’s more, with the debt avalanche, the total interest payments go from $30,278.96 to $11,684.07, saving you almost $18,600. The debt snowball also drops your overall interest payments just over $10,000 but is still almost double the amount of the debt avalanche while taking 4 months longer to pay off.

It’s also worth noting, the total interest paid for both the minimum payments with extra payments applied equally to each debt and the debt snowball are very close ($22,467.91 vs $20,109.89), while the debt avalanche is cut in almost half ($11,684.07). This is because the larger debt amounts have lower interest rates, so interest on those accumulate slower than the higher interest debt that is paid off first with the debt avalanche.

In this real-life example, Scotty should use the debt avalanche to pay off his debt sooner and save more in interest payments. This allows him to take the next step to financial independence sooner and invest the money that would be used for interest payments to build toward his Financial Independence Number.

Conclusion

While paying down debt should be one of the higher priorities when journeying toward financial independence and making work optional, how you pay off debt is also important.

When we first started paying down our debt, we used the debt snowball method. However, once we discovered the debt avalanche and did the math, it was a no brainer for us to make the switch to the debt avalanche as the overall cost of the debt was lower. This allowed us to put more money toward financial independence.

If you need the early wins upfront, then a debt snowball could potentially be the way to go to keep you psychologically in the game. However, if you are looking to save the most money and likely speed up the payoff process, then the debt avalanche will be the way to go.

Discussing how to improve your personal finances is one of the things I discuss in myFREE Financial Independence Plan Frameworkguide that you can download below.

If you are serious about financial independence or are still thinking or learning about it, then you should get this free download. What do you have to lose? It’s FREE!