Most people get into debt at some point in their lives — whether through student loans, credit cards, or car loans. Of course, the goal should be to pay off this debt so you can focus on improving your financial stability through successful investing and eliminating some of the fears surrounding money you might be harboring.
However, if you have multiple debts — and don’t have the liquidity to pay them off at once in full — which one should you pay first? There are two main strategies recommended to get out of debt: the debt avalanche method and the debt snowball method. This article will explain what they are and which one might be right for your situation.
The avalanche approach to debt repayment involves making the minimum payment required on every debt you owe, every month. Any remaining money for your debt repayments then goes toward the debt with the highest interest rate. As soon as you pay off this debt in full, you then allocate that monthly extra to the next highest-interest debt. You continue the cycle until all debts are paid off.
An example can help clarify how the debt avalanche method works. Let’s say you have three debts you’re working to pay off: a student loan, an auto loan, and a credit card. Each one has a distinct balance, an annual percentage rate of interest, and a monthly minimum due. Here’s a breakdown:
Let’s say you have $350 in extra money remaining for debt payments every month. In this case, you’d put that $350 toward the credit card balance. Once that first debt is paid off, you can tackle the student loan — the debt with the next highest interest rate.
Understanding the advantages and disadvantages of the debt avalanche method can help you determine if it’s right for you. Here are some of the pros:
That said, there are also drawbacks. These include:
While the avalanche method focuses on targeting the debt with the highest interest rate, the snowball method targets the debt with the smallest balance. Following this method, you likewise make the minimum payment required on every debt you owe, every month. However, any remaining money for your debt repayments then goes toward the smallest debt you have (instead of the one with the lowest interest rate).
The logic is that you’ll be able to knock this debt out more quickly than the others, gaining momentum (and motivation!) as you progressively pay off your debts. Once you pay off one debt in full, you then move on to the next debt with the lowest balance. Note that a mortgage (if you have one) is excluded from this approach.
Again, let’s say you have three debts you’re working to pay off: a personal loan and two different credit card debts. Each one has its own balance, APR, and minimum monthly payment due. Since interest rates aren’t a factor with the debt snowball method, we’ll just focus on the debt balance and minimum due. Here’s an overview:
Let’s say you have $320 remaining to go toward debts every month. Following the snowball method, you would put that $320 toward credit card No. 1, which has the smallest balance. Once that’s paid off, you’d move on to the next smallest debt, the personal loan.
The snowball method has its own set of pros and cons to consider when determining which debt repayment method is right for you. The advantages include:
Meanwhile, disadvantages of the debt snowball method include:
The debt avalanche and snowball methods both require you to pay off the minimum monthly payment on all of your debts every month. Where they differ is which debt you should focus on paying after those minimums are met. The debt avalanche method requires paying off the debt with the highest interest rate, while the debt snowball method requires paying off the debt with the smallest balance.
So, which debt repayment strategy is best? You might be surprised to learn that there is no one right answer. Mathematically, the debt avalanche method might seem superior since it can save you money on interest and improves the odds that you’ll become debt-free sooner.
However, successfully paying back all the lenders you owe isn’t just about having the cash — it’s also a psychological game. That’s where the snowball strategy has a distinct advantage. By allowing you to cross off your smallest debt quickly, this debt reduction strategy allows for quick wins, which can be hugely motivating and can give you the boost you need to continue to pursue your payoff strategy.
Paying down debt is largely about psychology. In fact, smart money management as a whole is about psychology. For example, take budgeting. If you feel you’re always restricting your lifestyle because of a budget, the odds are you’ll end up breaking it. A life of constantly saying “no” simply isn’t sustainable for most of us.
However, if you follow a conscious spending plan instead — allowing yourself to spend guilt-free on your favorite pleasures — you’re more likely to stick to it. Successful money management is largely about understanding your money dials — the things you’re really excited to spend money on — and allowing yourself to spend on those without guilt.
Likewise, choosing a repayment plan is a matter of understanding your own psyche. If you have the diligence to pursue the avalanche method, give it a try. If it’s a challenge, you can switch to the snowball debt payoff method. The bottom line is that either strategy will get you closer to debt relief and improve your credit score. There are also other ways you can take down debt, such as via debt consolidation.
“I Will Teach You to Be Rich” takes personal finance best practices and makes them easy to understand and — just as importantly — easy to put into practice. The key to success is largely in one’s mindset, and that’s what we try to address (in addition to giving you the fact-based information you need for smart investing, budgeting, and more).
Want to change your relationship to money? Our book covers the basics, including both practical matters and psychological aspects. Dive in and get ready for a more solid financial future. You can download the first chapter for free below. 
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