Avalanche vs. Snowball: Which approach pays off debt faster?

Michael Lux Best Of, Blog, Money Saving Tips, Student Loans 3 Comments

If you are serious about paying off your student loans, and any other debt you have, step one is obviously to make a budget.  But once you set aside money each month to pay down your debt, the next question is what loan do you pay down first?

There are two main approaches that people go with, commonly called Avalanche and Snowball.  The avalanche approach requires people to pay off their highest interest rate debt first.  The snowball approach calls for people to pay off their smallest loans first.

So which is better?

Answering this comes down to one issue: math vs. psychology.  If you go with the straight math, the avalanche method will result in your loans getting paid off the fastest.  In the long run you will end up spending the least on interest and therefore pay off your loans quicker.

However, the psychology of the situation makes the snowball approach seem like the better approach.  When you pay off your first small loan, you get a small victory, eliminate a monthly bill, and start a positive trend.  Your success “snowballs” until you have a ton of momentum and your debt is gone.  Even if this isn’t the most effective approach from a mathematical standpoint it could be the best for many people.  If snowballing keeps you motivated and helps you stick to your budget, it really can be the fastest way.

How do I know what is best for me?

If you are the type of person who sets a goal and sticks to it, than the avalanche approach is for you.  Suppose you decide that you are going to put $300 from every paycheck towards your debt.  If you have no doubt that you will stick to this goal, the avalanche will pay off your debt fastest.

If you are prone to make impulse purchases or have failed at your last three New Year’s resolutions, the snowball approach might be best for you.  The success of getting your first loan paid off can breed additional success as you eliminate your debt.  For many it is the best shot at success.  To see how the math plays out try this calculator.

Other considerations

In order to decide the best approach, you should look at all your debt and put together the plan that works best for you.  In fact, a hybrid system might work best.  Suppose that you have many loans to pay off.  If you have many low interest loans and two high interest loans, you might just decide to pay off the smallest high interest loan first.  That loan may not have the highest interest rate of all your loans or be the smallest loan, but tackling that debt could make the most sense from a mathematical and psychological point of view.

Know Thyself

Ultimately, your ability to pay of your debt will come down to your ability to make an honest assessment of yourself.  If you play to your strengths and find the best way to overcome your weaknesses, you will put yourself in the best possible position for success.