3 Reasons why the debt snowball defeats the debt avalanche

3 Reasons why the debt snowball beats the debt avalanche / Finance

Spiraling consumer debt is the main reason modern americans are so unhappy. In may 2016, the average household had about 5.700 in credit card debt, but if you look at just the households that balance, the average spike is up to 16.000 $. This is incredibly insane.

Now add car loans (an average of 30.000 USD for new and 18.500 USD for used cars) and student loans (30.000 USD for new students) and it is clear that we have a debt problem. I'm not blaming the system here. Except in extreme circumstances, we only have ourselves to blame if we take on too much debt.

That being said, there's no point in crying over spilled milk. It's time to bend over, attack our debt and free ourselves from this burden! My wife and I paid off debt in just under two years totaling 70.000 USD with a total income of less than 100.000 USD. If we could do it, so can you.

The two best methods of paying off debt

Before we talk about paying down debt, you need to determine two important things: your total minimum payment and your total available payment.

Minimum total is the sum of all minimum monthly payments on your current debt. You should never pay less than the minimum for a loan, as this will hurt your credit score.

Total available payment is how much money you throw at your debt each month. The larger this number is, the faster you'll be debt-free. Ideally, this should include every extra dollar you have left over after meeting your other financial needs, such as rent, food and insurance.

After you have determined these two numbers, you can think about a repayment strategy.

The debt snowball method

The debt snowball aims to kill as many loans as quickly as possible, even if this means paying more interest in the long run. The steps for the debt snowball are as follows:

  1. Determine your total available payment.
  2. Pay all minimums on all loans.
  3. Pay the remainder of your total available payment with the smallest remaining balance on your loan.
  4. Rinse and repeat as you pay off your loans. Do not change your total available amount as loans are disbursed. You want to "roll over" payments from one paid-off loan to the next.

The debt avalanche method

Debt avalanche aims to minimize the interest rate you pay on your loans, that means this method will save you the most money in the long run. The steps for the debt avalanche include:

  1. Determine your total available payment.
  2. Pay all minimums on all loans.
  3. Pay the remainder of your total available amount for the highest interest loan.
  4. Rinse and repeat as you pay off your loans. Don't change your total available amount as loans are disbursed. You want to "turn around" payments from one paid off loan to the next.

How much money you can really save??

The two methods may sound similar, and they are. The truth is that they are both extremely effective, and you can't make a mistake with either, as both will get you to debt freedom in record time.

Let's compare the two to see which is mathematically better.

For this comparison, we will use unbury.Us to visualize the differences. You simply plug in your loan numbers and compare snowball to avalanche for you. Other similar tools include unbury.Me, payoff.Io and the magnifymoney calculator. Use what you like best, or check out these other debt visualization tools. Here's how to visualize your debt and stay motivated while paying it off. Here's how to visualize your debt and stay motivated while you pay it off. However, visualization can make the process easier. Read more .

mattcastruccimazda.com 1: A simplified situation

Let's start with a simple but exaggerated situation. We have no debt except for two credit cards, and we've created a lot of consumer debt for both of them.

In this situation, we have a minimum total payment of 535 USD and a combined debt balance of 18.000 USD. If there was no interest, it would take about 2 years and 9 months to pay off. But if we consider interest first, it would take 4 years and 6 months and cost us 10.500 USD in interest!

By paying extra money on top of the minimums, we can reduce the interest we owe over the course of the debt, thus reducing the payment period.

Let's assume we can afford to allocate $800 per month (an additional $265 on top of the minimums) to fight the debt. If we look at the numbers in unbury.Us stuck, let's compare the two methods as follows:

  • Using the debt snowball method it would take 2 years and 6 months to pay off and we would end up paying 5.850 USD in interest.
  • Using the debt avalanche method it would take 2 years and 5 months to pay off and we would end up paying $4.900 in interest.

With both methods you can save a lot of money by making minimal payments, and you cut your debt time by half. If you use the avalanche method, you'll save about 1 over two and a half years in this scenario.000 USD.

mattcastruccimazda.com 2: A more typical situation

Here's a slightly broader situation that better represents what most people are seeing: different debt levels and interest rates.

In this situation, we have a minimum total payment of $655 and a combined debt balance of 42.000 USD. If interest rates were not an issue, this would be settled in about 5 years and 4 months. But since interest is an issue, it would take 6 years and 10 months and cost us 11.$150 in interest!

Let's assume we can afford 1.000 dollars per month (an additional 365 dollars on top of the minimum) to deal with our debt:

  • Using the debt snowball method it would take 3 years and 11 months to pay off and we would end up paying 5.650 USD in interest.
  • Using the debt avalanche method it would take 3 years and 11 months to pay off and we would end up paying 5.$450 in interest.

What is interesting about it? "Typical scenario" is that the snowball and avalanche methods have almost identical benefits. The avalanche method is still optimal, but you only save 200 euros over four years.

3 reasons why the debt snowball wins

The avalanche method will always do it save the most on interest payments. If you are a 100% logical person, this method is perfect for you. However, the snowball method has a number of benefits that may prove more valuable than the interest savings.

  1. The snowball method is psychologically rewarding. A recent study in the journal of consumer research it was found that people who use the debt snowball method are more likely to successfully get out of debt because paying off debt feels good and motivates them to keep going.
  2. The snowball method increases cash flow faster. Eliminating a debt also means eliminating the minimum payment obligation on that debt, which reduces the overall minimum payment. When your budget is extremely tight 15 cool tools for easy tracking and budgeting expenses tracking your expenses and budgeting are two crucial factors for a healthy financial situation. These 15 apps make it easy to do both. Read more, this extra breathing space can increase security and reduce anxiety if you need extra money for a month.
  3. Balance transfers can draw interest from the equation. Some credit cards will give you a 6-, 12- or even 18-month period of 0% APR when you transfer the balance of another card balance transfer with a credit card balance, you can save thousands of dollars if you do it right. Check out our advice and recommendations on credit cards. Read more (sometimes free, sometimes for a small fee). Turning your high-interest credit card debt into interest-free credit card debt while you snowball can be a win-win for many people.

So, what is the best way to pay off debt?

All things considered, here's what I recommend:

  • If you have loans with an APR of over 10%, you need to tackle them first, but rank them according to the debt snowball method. Debts with interest rates this high are considered emergencies.
  • Once you have eliminated these loans, you need to tackle the rest of your loans according to the debt snowball method.

This is a good middle ground between the two methods. However, feel free to adjust to your own needs and desires. If you can overcome a full avalanche, do it! If not, that's fine. As long as you pay more than your total minimum payment, you'll move forward.

For more information, see our guide to wiping out your debt. As quickly as possible. How to get rich: the fastest way to get out of debt. How to get rich: the fastest way to get out of debt imagine being debt free. No overdrawn balances or unpaid bills. There's a foolproof way to get out of debt. It starts with a plan and some discipline. Let's visit the other ingredients. Read more .

Struggling with debt? What tips, tricks and tactics do you use to set yourself free? Share your thoughts and experiences with us in the comments below!