Snowball

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Snowball or Avalanche, Which is Better?

Posted on by David

In our last post we discussed the snowball method of eliminating debt. This method prioritizes paying off your smallest debts first. Then once the smallest debt is eliminated, you take what you were paying on that debt and add it to the payment of your next smallest debt. It is referred to as the snowball method because, like a snowball rolling down a hill becomes bigger, the amount that you pay towards your debts become larger with each eliminated loan.

One of the biggest proponents of the debt snowball is author and financial consultant Dave Ramsey. According to Ramsey, “When you pay off that smallest debt first, you get a taste of victory. And that feeling of success is the momentum you need to tackle the next debt with a vengeance.” The snowball method works because it gives you the hope that paying off debt is possible. And hope is very powerful tool.

Debt Snowball vs. Debt Avalanche

Last post we discussed the criticisms of the snowball method. Because the snowball method has you paying off your smallest debts first regardless of interest rates, you will end up paying more in interest using the snowball method than if you were to use the avalanche method of prioritizing debts by interest rates. Critics will say that the snowball method is fundamentally flawed in this way.

So let’s do an example to see which is better: the debt snowball method or debt avalanche method. Let’s run the numbers to see if (and by how much) the debt avalanche saves you in interest paid and total time to pay back your debt. I’d never seen a breakdown like this before, and I was curious. Let the math begin!

Using Unbury.me I created a debt budget. I decided to simulate a young couple who recently graduated from college (because I have experience with that). The family has two car loans, 2 student loans and some credit card debt. I selected the interest rates and principle amounts specifically so that each method would prioritize paying off the loans in different orders. The calculator has the option to choose between each payment type and also the option to increase your monthly payment. In this case the minimum was $1,775, but you could allocate more money to pay off your debt quicker. I chose to leave it at the minimum because increasing it didn’t affect which option was better.

5 loans total $65,000
Pick your poison: debt snowball or avalanche.

Let’s Crunch Some Numbers

These loans come out be a total of $65,000 worth of debt which is a pretty hefty sum, but even paying the minimum of $1,775/month it can be eliminated in just a few years. So which option is better?

Using the snowball method of paying off the loans with the lowest principle first, this hypothetical couple will have finished paying off their debt within 43 months. The amount of interest paid on this debt will be $11,555.21. Killing $65,000 of debt in under 4 years is pretty impressive. The reason this is so fast is because for each loan that is paid off all of the money you would normally put towards that loan can be lumped into your payments to the next loan. So how does this compare to the avalanche method?

debt snowball works
Using the debt snowball method the debt is paid off in 43 months

If we switch over to the avalanche method of prioritizing the highest interest loans, this hypothetical couple will be able to finish paying off their debt within 43 months. Exactly the same amount of time. Well that’s not exactly shouting a clear winner is it? What about interest paid? The avalanche method does pay less in interest over those 43 months. Using this method the couple pays a total of $10,985.44 in interest which is $569.77 less. That’s about $13 a month less.

While not nothing it’s not a smashing victory for the avalanche method. I’ll be honest, I really expected the difference to be a lot more drastic! After all the hate the snowball method receives for wasting your money, you’d think it would be a runaway victory for the avalanche. Seems less like an avalanche and more like a snowdrift to me.

debt avalanche works too
Using the debt avalanche method the debt is also paid off in 43 months

An Unclear Victory

So which one is better? That’s up to the individual to decide. On a purely math basis the debt avalanche is the option that ends up saving the most money. In this case the debt repayment dates were the same. I tried changing the different loan amounts to see if that would result in different repayment dates. It technically did, but I had to make drastic changes to create any big difference. For example if I up the credit card debt (18% APR) from $9,000 to $40,000 (huge) the avalanche method still only pays off the debt 4 months quicker than the snowball method.

[The Debt avalanche method] might sound like smart math. Here’s why it’s not: Debt isn’t a math problem. It’s a behavior problem.

Dave Ramsey

So if you’re a purely mathematical person who doesn’t insert emotion into their rationale, the debt avalanche may be your better option. But if you operate purely based on math, you probably aren’t in debt. Or at least not that much. That’s probably why Dave Ramsey says that “Debt isn’t a math problem. It’s a behavior problem.” The reason people get into debt they can’t control is because they aren’t being objective and rational.

This is why the snowball method has worked for so many people. Because paying off those small debts first give you that feeling of accomplishment that gives you the motivation to pursue your larger debts and as Dave said, “Motivation is the key to becoming debt-free, not math.”

Conclusion

We have friends who have used the snowball method with a lot of success, and the story is the same every time. “We didn’t think we could do it. Our debt was so daunting! And then bam! First debt completely gone. It was like we could suddenly breathe again.” Don’t underestimate how much of a head game paying off debt can be. You can choose whatever debt repayment method you like, but whatever you choose, start now! The sooner you start, the sooner you can be to a more Financially Independent place. And remember, it’s OK for it to be a slow burn.

What do you think? Were you surprised by my results? Do you see any flaws in my math? Impossible, I know! Let us know in the comments below.

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Dave Ramsey and the Debt Snowball

Posted on by David

When it comes to eliminating debt there is usually one name comes to the forefront of everyone’s minds: Dave Ramsey. Ramsey is a radio host, TV host, author, and champion of the debt snowball. This method prioritizes paying off your debts from smallest to largest. Once the smallest debt is eliminated, you take what you were paying on that debt and add it to the payment of your next smallest debt. This is referred to as the snowball method because, like a snowball rolling down a hill becomes bigger, the amount that you pay towards your debts become larger with each eliminated loan.

Ramsey is no stranger to the kind of debt or financial hardship that he counsels people through. In college he began investing in and selling real estate and by 26 had amassed a $4 million portfolio. However he had become over-leveraged and by the next year he declared bankruptcy. Eventually, after recovering from his bankruptcy he began offering financial advice to couples at his church and that turned into a financial counseling business that has helped 6 million families get out of debt. And one of the biggest things he recommends, like we already mentioned, is the snowball method.

Why the Snowball Method?

Advocates of the snowball method argue that the reason it works is because paying off the smallest (easiest) debt first gives you that first victory quicker. Claiming that first victory quickly is exciting and gives you the motivation to keep working at paying off your debt. After the first debt is payed off, all the money that you were paying towards that debt can be added towards paying off the next smallest debt. That extra amount then helps you pay off the next debt quickly as well, giving you more excitement and motivation to conquer your debt.

Being deep in debt, on top of the financial burden and pressure it puts you under, can lead to a real sense of hopelessness. Oftentimes, paying the minimum towards debt can land you deeper in debt than you were before that monthly payment. The whole situation feels a little like drowning. The snowball method works because it gives you the hope that paying off debt is possible. And that hope can be just as important to conquering debt as reason and logic.

Snowballs eliminate debt... and maybe your friends

Criticisms of the Snowball Method

Critics of the snowball method counter with the fact that prioritizing your debts by principle amount rather than interest rate means that you’ll end up paying more in interest than you would if you tackled the debt with the highest interest rate first. That’s true. This is sometimes referred to as the avalanche method (I think just because it follows the same snow motif). Paying off your debts with the highest interest rates first will minimize the total amount payed in interest.

Since your smallest debts may not have the highest interest rates, you will end up paying more in interest using the snowball method than if you were to use the avalanche method so logically the avalanche method is a better option. Because of this I was firmly in the debt avalanche camp. But remember what I said above: “Hope can be just as important to conquering debt as reason and logic.” Debt is illogical. Most people get into debt by trying to keep up with the Joneses. There are a few good reasons to get into debt, like a buying a house, but most of the time getting into debt is illogical. Because of that it’s very difficult to logic your way out of debt.

Debt isn’t a math problem. It’s a behavior problem.

Dave Ramsey

Debt Snowball vs. Debt Avalanche

So which is better, the snowball or the avalanche method? Well if you like instant gratification and prefer to see results quickly the snowball method may be right for you. It allows you to quickly see initial victories and that momentum helps to motivate you to clinch those next victories. Perhaps a debt-repayment plan with a longer outlook for eliminating the first loan may cause you to lose motivation and give up on getting out of debt.

If you are the kind of person who is able to formulate a plan and stick to that plan for the long run, the avalanche method may be the better option for you. If you’re the kind of person who goes into your undergraduate fully expecting to take 12 years to finally finish your PH.D then you can probably take advantage of the avalanche method and thrive.

The FIRE community has been known for its math-based logical approach to eliminating debt and reaching financial independence so it’s probably safe to say that the debt avalanche approach is a better option for most readers here. But then again the kind of people who create a plan and stick to it unflinchingly for years on end aren’t usually the kind of people who frivolously get into debt. So that may be a moot point.

According to Ramsey’s website:

The debt avalanche and debt snowball have a similar goal: to help you become debt-free. But the debt snowball gives you motivation, and motivation is the secret sauce that gets you debt-free faster! When you pay off that smallest debt first, you get a taste of victory. And that feeling of success is the momentum you need to tackle the next debt with a vengeance. 

With the debt avalanche, you won’t get a feeling of accomplishment for a long time. You could lose steam and give up long before you even pay off the first debt! Sure, it might make sense mathematically to begin with the debt that has the highest interest rate, but—let’s get real—if we were focused on math, we wouldn’t be in debt in the first place.
Most fiscally responsible credit card ever

Conclusion

I went into this study favoring the debt avalanche method of paying off the highest interest loans first. And in my mind I still prefer it. For example the best investment you can make is paying off credit card debt. But I’ve never been in debt (other than a mortgage) so I guess this debate really isn’t for me.

But for people who feel crushed beneath the weight of their debt maybe the snowball method is the best way. I think I’m coming around to this side of the argument. Little victories early on in the process can make a marathon feel more like a sprint. And they can make it feel less daunting. If you are the kind of person who can stick to a plan by looking years into the future, the debt avalanche method is probably better, but for most people in a lot of debt the snowball method has real potential. Because for most people debt isn’t a math problem. It’s a behavior problem.

I our next post we’ll simulate a family’s debt with several different loans at different interest rates and calculate which option is better.

What do you think? Have you worked your way out of debt? How did you tackle it? Let us know in the comments below!