Snowball Or Avalanche? Which is the best method to pay off debt?

Has January been as hard financially for you as it has been for me? I may not have the data to support it, but I bet a lot of people resorted to borrowing to get through the month, after indulging in December.

If you did, you can imagine the discouragement at the end of the month, when your payslip has a high figure at the top and barely anything at the bottom after all your debts have been deducted. To make matters worse, when it is bad debt, you are probably no longer enjoying the benefits of the item you bought with the loan, yet you are stuck repaying it. The demotivation caused by repaying debts can even drive you to take even more debt, to “enjoy life a little bit”. I know this, I have done it!

If becoming debt free in 2013 was one of your resolutions, you have probably encountered the two most popular methods to pay off debt: The Avalanche and Snowball methods. Today, I look at the two, and evaluate if any is better than the other.

1. The Snowball Method:  Popularized by radio talk show host Dave Ramsey, the snowball method recommends making minimum payments on all your debts, while throwing all your extra cash at the smallest debt on your list. Once you’re done with it, you move to the next one and so on, until you repay all your debts. You can read about it here. The beauty of the Snowball method is that as you pay off your debts, you have more money available to pay bigger amounts.

The Snowball Method has one key advantage: It recognizes that we are emotional beings, and as Ramsey says, personal finance is 80% behaviour and 20% head knowledge. By seeing small wins right from the start, the Snowball method encourages you to keep going, and to stick to the plan. However, more often than not, with this method, you end up paying much more in interest costs, and taking longer to pay off your debt.

2. The Avalanche Method: This is the “textbook method” where you make minimum payments for all debts, and you dedicate extra cash to repaying the debt with the highest interest rate. In most cases, this is the fastest method to being debt free, and results to less interest payments compared to the snowball method.

So Which Method Is For You?

If you have several debts, I recommend that you first assess the impact of the two methods using a tool like Unbury, which enables you to calculate the time it will take you to clear your debt, and the total interest you will pay using either method. If the difference isn’t substantial, then choose the method that works well with your personality as explained below. If it is substantial, then you may want to re-evaluate your personality (kidding!). Seriously through, you may want to change to accommodate this.

If you are a highly rational and analytical person, then the Avalanche  Method will make more sense. Guard against demotivation by setting milestones and celebrating them to keep you going.

If you crave quick results, simplicity and your spending decisions are driven by your emotions,  the Snowball Method is for you. This is ideal for those people who have been in debt for a really long time, and need to “keep winning to keep going”.

Whichever method you choose, stick to it, and you will succeed. As Dave Ramsey says: “You can’t go wrong by getting out of debt”