snowball vs avalanche

Debt Snowball vs. Debt Avalanche: back to basics!

Debt Snowball vs. Debt Avalanche


Let’s get back to basics! What is the best way to pay off debt? Debt Snowball vs. Debt Avalanche?

If you want momentum and psychology on your side, pick the debt snowball. Choose your smallest debt balance first, and roll on down to the larger ones.

If you want math on your side, what about the debt avalanche? Here, you pay of the highest interest rate debts first.

Let’s compare both of those methods using math and visually show which one wins!


An Example of Debts to Compare Debt Payment Strategies

debt avalanche

Figure 1 (Debts, interest rates, payments, and amount owed)

Above, see an example of debts. There is a car loan, credit card, a personal loan, student loans and a mortgage.

The type of debt, APR, payments and amount owed are listed. Total debts are $640k (yikes!) and minimum monthly payment is $3,046.


Debt Payment With and Without Extra Payments

debt snowball

Figure 2 (balance of debt with and without extra payments)


Above, in blue you can see the balance of debt over time without any additional payment. Initially, you can see a rather rapid drop off as the car loan is paid off. In total, the debt takes 30 years to pay off—the balance of their mortgage is all that remains at the end.

What if they throw an extra $1000 a month at the debt? In this setting, the money will be spread out proportionally to all the debts. You can see with the extra payments they save more than $74,000 and pay off the debt nearly 5 years sooner. In this setting, once they finish off the debt, the money is not snowballed or avalanched into the other debt, though they continue the extra $1000 a month throughout.


Can we do better with the debt snowball or the debt avalanche?


The Debt Snowball


payoff with debt snowball

Figure 3 (payoff with the debt snowball)

Above, we use the same $1000 extra a month on debt payment, only we use the debt snowball. Paying debt off smallest to largest, you save over $217k and are debt free almost 20 years earlier! Using extra money to pay off the small debts, and then rolling all the money onto the next largest debt really pays off!

If you can stick to any debt repayment plan, you are going to be better off. The strength of the debt snowball is it gives you small wins in the beginning. These small wins encourage you to keep going on your journey to being debt free.

We know, however, that the debt snowball is not optimal mathematically. How much better does the debt avalanche do than the debt snowball?


The Debt Avalanche

Using the debt avalanche you are debt free at 237 months—only one month different than the debt snowball.

You save $220,709— $3,391 more than the debt snowball. This is about $170 a year in savings.

Are you surprised that the debt avalanche isn’t that much better than the debt snowball?

Let’s see why!


Comparison of Payments and Payoff Time with Debt Snowball vs. Debt Avalanche

Debt snowball vs debt avalanche

Figure 4 (Sequence of payoff and debt balances)

Figure 4 is a little bit complex, but stick with me for a second as there are lessons to be learned about debt snowball vs. debt avalanche.

The payoff sequence is listed for debt snowball vs debt avalanche.

You can see the snowball attacks them from smallest to largest, and the avalanche pays the largest interest rate first.

For the debt snowball, the car is paid off first with the minimum payment plus the extra $1000. It only takes 7.7 months to pay off this debt, and then the credit card is next. By the time the credit card is paid off, the personal debt is already paid off as well so you move on to student loans and then the mortgage. Note that the snowball frees up cash flow more quickly than the avalanche. This is an unexpected benefit if the money is tight.

With the debt avalanche, the credit card is paid first. It takes almost two years to pay off this large bill. That would be a frustrating two years for sure! Next, the car payment is finished in short order, and the personal loan as well. Next, notice that the mortgage is paid off before the student loan. Well that’s interesting. Let’s do a quick aside: should you pay off student loans or mortgage first?


Should you Pay Off Student Loans or Mortgage First?

Which should you pay off first: your mortgage or your student loans?

Both of these debts are considered “good debt.” Honestly, though, if you can be debt-free—why not? You need to pay them off at some point, and this discussion is not pay off debt vs invest. For more on pay off debt vs invest, see 15- vs 30-year mortgage discussion.

Of course, before you do so you should have an emergency fund, no consumer (“bad”) debt, and be at least getting your match on your 401k.

In addition, student loans are not bankruptable, and, of course, neither is the mortgage without selling the home.

What about tax deductions? The Mortgage tax deduction is limited by your ability to get above the standard deduction. That is, more than 90% of folks are taking the standard deduction and not able to benefit from a tax write off due to mortgage interest.

On the other hand, student loan interest write-off is limited to income. If your Modified AGI is above $70k (single) or $140k (Jointly), the ability to deduct your student loan interest phases out.

What about refinancing? You have to pay to refinance your home, where as you are paid to refinance your student loans!

No one can predict interest rates, of course. In the end, everyone’s situation is different and there is no winner between paying off the mortgage vs student debt.


Conclusion Debt Snowball vs Debt Avalanche

So, here is the scoop. Debt snowball vs debt avalanche—it doesn’t matter!

Using debt snowball vs debt avalanche is essentially a wash! Just like paying off the mortgage vs student loans!

All of that for the answer: it doesn’t matter? Yup!

The most important factor comes down to SAVINGS RATE. If you want to be Financially Independent than you must pay off debt. The shockingly simple answer to financial independence is, of course, savings rate.

Debt payment method (snowball vs avalanche) and even debt payment in general doesn’t compete with savings rate. Just like with investing, average returns don’t matter compared to savings rate in the beginning. So too with debt payment method.

Of course, don’t go all Dave Ramsey on me and pay off your debt rather than get your match on your 401k. Dave is right when he says “if you could do math you wouldn’t be in debt in the first place.” But come on Dave, have a little bit of sense and take the free money.

Just get out of debt.

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