So you’re trying to pay off your debt. First of all, you should take a minute to celebrate yourself for recognizing that you need to do this and that you’re actually doing something about it! Next is you heard there are two approaches on how to pay off your debts: the debt snowball or the debt avalanche. I’ve done and used both so I’ll briefly explain what they are, the differences, and the pros and cons for each.
Snowballs are formed when you start rolling a small amount of snow until it becomes big enough the size of a boulder. Debt snowball was derived from that.
The process is that you would line up all your debts and order them by total amount owed. You would then pay off the minimum payment(s) of all the debts you have and then after that’s done, ideally you would dump the remaining money you have (or pay with as much as you can to the debt with the least total amount.
So if you have:
- credit card 1: $4,000
- credit card 2: $5,000
- line of credit: $10,000
you would then pay off all the minimum payments of credit cards 1 and 2, and the line of credit, and then you would dump as much as you can to credit card 1.
The goal of debt snowball is more emotional than mathematical or emotion. The goal is you get to fully pay off your smallest debt gaining you that momentum, the feeling of success, the feeling of “you can do it!” (because you totally can!). It gives you something to celebrate and at the same time it gives you the motivation, the gas to keep moving forward!
I think it’s definitely powerful and something most people scoff at or underestimate at first sight. Paying off debt is rarely an explicitly financial problem. Your purchases were guided my emotions so in essence, emotion is the cause why you’re in the hole you are in right now.
With debt snowball, you’re now trying to correct the root of the problem: your financial habits, your relationship and how you look at money.
Paying off debt is usually a long time of a process and it’s daunting and difficult for most people to start (or even follow through) because the entire debt or the process are just overwhelming.
Debt snowball attempts to resolve and mitigate that as you go.
Well first of all, when I say “cons” it’s not really an invitation or a reason to not use this approach. Just look at it as a tradeoff or price of the process. Nothing is free in this life…even the way you pay your debts 🥲
The only con of this is that, mathematically and/or financially you pay more on interest on the total debt over the maturity of the debt.
Debt avalanche is the opposite wherein, like an avalanche, it just starts strong and hard and it tapers off in the end. We’re more interested in the first parts of that analogy.
How it works is that you would list your debts and order them by interested rates (NOT the total amount owed, NOT minimum payment).
So continuing the example from debt snowball, let’s put an interest rate examples on those:
So if you have:
- credit card 1: $4,000 (interest rate: 7%)
- credit card 2: $5,000 (interest rate: 12%)
- line of credit: $10,000 (interest rate: 20%)
you would then again pay the minimum payments of all debts (can’t skip that), and then you would dump all your money and try to pay off line of credit first (instead of credit card 1 if you were using debt snowball)
The main reason for paying off the highest interest first is that mathematically and/or financially, is that you pay the least amount of interest ($) in the end. Here’s an example
|Label||Balance||Interest rate||Monthly interest (in $)|
Let’s assume you have the following debt and let’s say you just let the debt run and not pay anything. Every month, your debt gets bigger according to the last column. The more interest, the more you accrue per month.
Now let’s say you get a lump sum money of $5,000 so you now have an option to pay one of these off in one go.
If you pay off debt 1, then that means after month 1, you now have to pay $5,080 in total. But if you paid off debt 2 first (debt avalanche), then after this month 1, you would only have to pay $5,050; $30 cheaper.
Now to be realistic rarely do we get $5,000 fall on our laps and when you’re paying off debts you’re probably paying close to as little as you currently can. That means your interest compounds over time so that “$30 difference” is much more drastic in your situation.
This approach is perfect if you have strong mental fortitude(strength). That means you have mastery and control of your urges, wants and needs, and you have the gazelle intensity, as Dave Ramsey puts it. This means essentially that you can take the emotions out of the problem equation and you can focus on the math of it all. What you end up with is less interest, less total debt amount, and more money in your pocket.
The main con to this is also emotional. That is, if you just started getting a grasp of your insurmountable debt and you’re just starting to correct your relationship with money, it becomes very daunting and overwhelming to even just pay for the first debt.
If your smallest debt amount is $1,000 and your debt with the highest interest rate is $5,000, it will then take you roughly 5x longer to pay off your first debt using debt avalanche. Sure you get the pro, but again only if you have the mental fortitude to brave it, keep going even when you’re emotionally exhausted.
Because as much as the pro is enticing, for some people is it really a win if you can’t even get there right? If it takes your 5x longer and you relapse or get more debt, or worst, you just give up entirely, then it would’ve definitely been better if you just did debt snowball right?
So which should I use?
Well here’s my personal tip for you. Maybe you haven’t framed the approach this way so I hope this would be a help for you.
Most people think of this question as binary; that you have to pick one and that’s it. You can’t change, or that the other option is not available to you anymore. Have you ever thought that maybe you can use both (if you have to)?
The way I’ve personally did it is that I’ve started with debt avalanche first, and then after years, I’ve switched to debt snowball at times just to get my groove back and then I get back to debt avalanche again when I have my bearings right.
“Wow, how did you have the mental power to stick to debt avalanche as the first step?!”
Easy. When you have such a mountainous debt, your back’s against the wall, you’re stepping on the edge, you have no other options, your life is breaking down and your life will continue to pierce through rock bottom if you don’t do anything, you don’t really need any other “motivation” anymore. THAT. IS. YOUR.
Paid my highest interest rate, max out credit card with the motherfucker, HUZZAH.
“Ok so why did you have to switch to (something like) debt snowball if it’s going well?”
Well I’m just human. Paying off the above was a monumental feat already in my world and I was so happy with it. I did cautiously ease off the gas pedal for a bit, admittedly and as planned (so I can recover some peace of mind and quality of life) but I was still determined to get to my ZERO-debt life goal.
Enter another concept: Debt fatigue
What happened was I was just hit with an intense debt fatigue. It was so hard to get back on track and there were some practical bills that I had to pay in advance, at the same time, so my Mint account was just red for the longest time. My graph for Net Worth over time was plateauing and my debt month by month was increasing again.
I then had to switch to a “pseudo debt snowball”. I paused paying the highest interest and first goal was just to stop the bleeding. The first goal was just to stop the expenses. This month’s total expense should be equal or lesser than last month’s expenses. That took me a month or two.
The needed “wins”
After that I used marketing tactics against myself. I made it a priority to clear out my credit card again (this time I was using the low interest one ha). Then I would pay just enough in my high interest debt. I would just pay on some months and have no expectations. But the thing I was really looking forward every month is the chance to pay off my balance from something like $10,000 for example and then paying $1 for example, to make the balance more visually appealing as $9,999.
You know how it is right? Price out there if it’s $100, in your head it’s expensive. But if you see a “$99” sign somehow it becomes “much more affordable” right?! It’s money psychology lol.
So I did the same thing! It became emotionally and mentally satisfying when you see the thousandths place value change. I’d take great satisfaction off of these moments like a drug addict and I’d get my high, and next thing you know it becomes easier and easier to get back to being “gazelle intense” and now I’m back to debt avalanche.
I guess I technically didn’t do debt snowball or cleared a small debt completely, but you know what I did there. I
wantedneeded some quick and/or small wins to get the spirits up.
So that’s what I would suggest for you. Ultimately, if the stars were aligned, I’d say go debt avalanche the whole way. That’s the most practically and financially sound approach (barring emotional handicap).
But usually that’s just for the gods and if you had that unmovable spirit, you probably wouldn’t have been in a debt problem to begin with. That said, I would suggest to mix and match both.
Use debt avalanche as much as you can and throttle down to snowball if you can. Maybe your experience is like mine. Or maybe your experience is the opposite. Maybe you’re honest with yourself and you know you need to do debt snowball to start to get the habits right. And then maybe later on you get a raise or promotion or more capacity to pay then maybe swapping to debt avalanche then wouldn’t be as strenuous as if you started with it.
Either way, more power to you king/queen. Crush that debt. You can do it. I believe in you. Glory awaits you at the end of the journey.