How to Use the Debt Snowball and Debt Avalanche Methods
With the debt snowball, you pay off debts in order from smallest to largest. With the debt avalanche, you direct extra cash toward the debt with the highest interest rate.
How quickly and efficiently you can repay your debts is based on your financial situation but we shouldn’t overlook the effect of psychology, too. Money management might be practical, but it is also emotional.
Modern life often means we have many debts and repayment schedules to juggle, with multiple credit cards or overdrafts as well. All have different interest rates, different payment terms, and reams of small print. It can be hard to compare which is the most expensive, which is the cheapest, and to keep on top of them all. The result? We don’t pay down our debt as quickly as we could afford to because it all feels too overwhelming. The problem with debt is, however, the more you ignore it, the more it grows.
» MORE: How to get out of debt
How to best organise and prioritise your debt repayments depends in part on your personality and lifestyle. One of the most popular methods is using the debt snowball approach. But how does it work, does it suit you, or would you be better off taking the alternative debt avalanche approach instead?
What is the debt snowball method?
A snowball starts tiny, gathering momentum and growing bit by bit as it rolls. The same principle is at play in this method of repaying debt.
Many people find it much easier when faced with a seemingly insurmountable task, such as clearing your credit card balances, to start small and build on their habit, taking motivation from ticking off little, but regular wins.
The debt snowball method works as follows. Lay out all the debts you have across different accounts, credit cards, overdrafts or loans, the types of debts that you want to clear as quickly as possible because they are costing you a lot in interest and fees. This doesn’t include student loans and mortgages because they are different kinds of debts. Examine the interest rates and balances on all of them. Received wisdom is that you should focus on putting all money towards paying off the most expensive debts first, but doing so might take a long time and leave you feeling demotivated.
The snowball method suggests focusing your efforts and any spare cash on clearing your debts one by one, starting with the smallest and easiest to get rid of. This way you can close accounts, and reduce the onslaught of letters and correspondence, hopefully boosting your confidence and energy to keep going.
It is important when using the snowball method to make sure you keep up all minimum payments required on each debt you have, but any spare cash or savings left over once you have met the minimum is directed towards the smallest one.
The downside of the snowball method is that you will pay more, but it might save you money in the long run if you actually keep up the discipline of paying down debt because it feels more realistic and manageable.
The debt avalanche method
If you want a method to tackle your debts but would rather save as much money as possible, and are less motivated by closing accounts quickly, you could try the debt avalanche approach.
Like the snowball, keep up minimum payments on all your debts, but direct any extra cash towards the debt with the highest interest rate, first. It might take you longer to close accounts, so you don’t get the same sense of victory of ticking a debt off your list, but you’ll save more money in the long run.
Don’t neglect priority debts
Whichever method you choose, it is very important to first recognise the different levels of priority of your debts. Some, such as council tax, will come with grave consequences, like being taken to court, if you do not pay. If you don’t pay your mortgage or rent arrears you could lose your home and if you don’t meet your energy bills in full your electricity or gas could be cut off.
Before you take on either the snowball or avalanche method, make sure you are meeting all your priority debts. Then decide which ones to tackle based on knowing what will keep you motivated.
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Laura is a journalist and author, writing about money since 2008. Including writing for The Times for 9 years. She believes finance doesn't need to be complicated. Author of Money: a user's guide. Read more