What’s better for those just starting to pay off debt, the debt snowball or debt avalanche? On the surface, the debt avalanche is superior but there’s more to it than that.
What is the Difference Between the Debt Snowball and Debt Avalanche?
The debt snowball is paying off the lowest debt first and then moving on to pay off the next one. The debt avalanche is paying off the highest interest debt first and then moving on to the next debt.
The idea behind the debt snowball is to get quick wins and build psychological confidence with each win. While the debt avalanche is about optimization in paying off the highest interest rate first.
In both the debt snowball and debt avalanche, once you finish paying off a debt, you’ll take the money you used to pay into the paid off debt and add it to the next debt. For example, if you previously paid $100 per month to pay off a credit card, you would then add that $100 to pay off the next debt, along with the minimum payment you were previously making.
For an in depth analysis of both methods, check out my detailed post on this topic, including another strategy, the hybrid method. Or read the chapter on debt in my book Cash Uncomplicated.
Why The Debt Snowball Is Better For Those Just Starting to Pay Off Debt
From strictly a math perspective, the debt avalanche is better because you’re paying off the highest interest debt first. That’s completely overlooking the psychological and behavioral component though.
Someone who is in consumer debt has spent over their budget, often way over. That’s a money behavior problem. To correct that behavior, it’s important to replace it with a new behavior.
Simply telling someone to optimize using the debt avalanche would be an oversight of the psychology and behavior that led them to this position of consumer debt in the first place. The debt snowball is the replacement behavior that positively reinforces the person by giving them small wins in the beginning.
Small wins are exactly what is needed because for most people to continue with a positive habit, they need to see some results. Seeing a small consumer debt vanish is exactly the small win that’s needed.
An Example
For example, take this person with four credit cards to pay off.
- Credit card 1: $9,000 at 25% interest
- Credit card 2: $875 at 21% interest
- Credit card 3: $2,000 at 22% interest
- Credit card 4: $7,500 at 24% interest
If someone tries to pay off the highest interest rate debt first, they’d have to wipe out an entire $9,000 before getting a win. That’s a long time to wait and for a person who has gotten into bad spending habits and consumer debt, it would be very easy to give up.
However, using the debt snowball, they’d pay off $875 first, even though it’s the lowest interest. Once the $875 is paid off, they get the first win. $875 isn’t that much to pay off but it gives a huge psychological boost. That’s the inspiration needed to move on to the next one, $2,000.
By the time this person gets to the higher number of $7,500 they already have two wins under their belt and will have the drive to keep going. Even though it’s going to take more time to get $7,500 paid off, they’ll know they can do it.
Optimization Isn’t Always The Best Answer
Optimization isn’t always the best answer and there’s more to it than just the math. The debt snowball gives the much needed psychological wins and helps the person who got into debt get some confidence to pay off their debts. Otherwise they’re just stuck in the abyss of what seems like no progress because the wins are too slow to come by.
