The Debt Snowball and the Debt Avalanche are the two main strategies for paying down your debt. The Debt Snowball method says you should start by paying off the credit cards or loans with the lowest balances first, while the Debt Avalanche method tells you to pay off the accounts with the highest interest rates first.

 

First, a metaphor

Imagine you’re a firefighter and are called to save a burning house. You enter the house, and see two main areas of fire: two burning logs in one corner, and five burning fuel tanks in another. The logs are bad, but the fuel tanks are wreaking havoc. Which do you put out first?

Most people’s gut reaction is obvious: put out the tanks. Those things are going to blow up.

However, if these two groups of burning objects were your debts, the snowball method would tell you to put out the logs first, because there are fewer of them (only two!) Then, after an early victory, you move on to the fuel tanks.

The avalanche method would tell you to put out the fuel tanks first, because they are more flammable and spreading fire faster. Here’s the reality: Your high interest debts are like those fuel tanks, burning down your financial house. Due to compound interest, they cause much more damage than low interest debt, no matter what size the debts are.

 

The current debate

Most people will tell you that your strategy is a choice, depending on what you value most while paying off debt: (1) overall speed & savings or (2) sustained motivation. (But you can’t have both).

Internet and radio personality Dave Ramsey has made the Debt Snowball famous and has championed it for years. He says it’s the best way because it helps you build up momentum by paying off the accounts with lowest balances first. You get quick wins by paying off accounts, and this makes you more likely to stick with your plan. After all, saving money is great, but it’s not gonna happen if you can’t stick with a plan long-term. However, proponents of the Debt Avalanche point out that you can lose thousands of dollars by choosing not to tackle your highest interest accounts first.

 

How big is the difference, really?

Say you have the following debts:

Student Loan:  $15,000 balance, 4.5% interest rate
Credit Card 1:  $5,000 balance, 12.99% interest rate
Credit Card 2:  $25,000 balance, 29.99% interest rate

If we assume you can pay $3,000 per month to get out of debt, your debt payoff timeline using the Snowball method would look like this:

Debt Snowball. Total interest paid: $9,416.16

So you would be entirely debt free by May 2013, and you would pay a total of $9,416 in interest. Ouch.

Now let’s look at what your timeline would be with the Avalanche:

Debt Avalanche: Total interest paid: $5,979.26

Using the avalanche, you would be debt free by March 2013, a whole two months earlier, and you would save $3,436 in interest!

Let’s say that again:  just paying your debts in the wrong order in this situation would have cost you over three thousand dollars. (You can run the numbers on your own finances here: http://unbury.me/) Why, you ask? Let’s clarify what’s happening with a metaphor.

The difference may be larger or smaller, but the Debt Avalanche always wins in terms of time and money saved. Clearly, it’s the more financially logical way to pay off your debts.

So assuming you stick with your plan, the Avalanche method is superior. However, we can’t forget about the emotional aspect of paying down your debts. As Dave Ramsey says when recommending the Snowball, “the math seems to lean more toward paying the highest interest debts first, but what I have learned is that personal finance is 20% head knowledge and 80% behavior. You need some quick wins in order to stay pumped enough to get out of debt completely.” In other words, the plan you choose doesn’t matter if you give it up after three months.

 

And the winner is…

And that brings us to our conclusion: We think you should have the best of both worlds. You should save as much time and money as possible and be rewarded, motivated, and congratulated every step of the way. Why choose between saving money, and feeling good about it?

We’ve built a tool that helps you do both of these things. It automatically directs you to pay off your high interest accounts first, but it also gives you emotional encouragement along the way. Made your payments this month? We display that visually so you can see your progress and get excited. Paid off 25% of one account? We’ll take notice, and email you about how awesome that is. We’re there with the perfect plan, helping you save money and feel good about it.

That’s ReadyForZero’s method – you get the speed and savings of the avalanche, and the emotional motivation of the snowball. In the war against debt, every little bit helps, and you should use every tool you have to get it done. We’ll help.

Give ReadyForZero a try and let us know what you think!

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