After you get your $1,000 starter emergency fund saved, it’s time to pay off your debt. If you have just a few thousand dollars of debt, and it’s going to take you only a few months to pay it off, it doesn’t really matter which debt you pay off first. However, if you have enough debt that it’s going to take you more than a year to pay it off even if you are gazelle intense, then you need a process, and you need a process that works. The process that you need is the debt snowball. Let’s see why the debt snowball works when paying off your debt and compare this to the debt avalanche method.
The debt snowball is when you list all your debts smallest to largest and pay off the smallest debt first. You make your minimum payments on your debts and put all extra money in your budget to your smallest debt. After your smallest debt is paid off, you pay off the next smallest debt. You keep going until all your debts are gone.
Each time you pay off a debt, you put all available money to the next smallest debt. You don’t pay off your car just because it’s a debt that you don’t like. You don’t pay off a credit card debt because a creditor is calling you. Keep working on your smallest debt each time when working your debt snowball.
The debt avalanche is when you list your debts in order of interest rates. You make your minimum payments on all your debts and put all extra money to the debt with the highest interest rate.
With the debt avalanche method, the theory is that paying off the highest interest debt first is going to be the fastest way to get out of debt. Mathematically, it might be the fastest way to go. Even though we are going to be gazelle intense with paying off our debt, the absolute fastest way is not necessarily the best.
Why the Debt Snowball Works
When my wife and I paid off our debt nine years ago, we started paying it off based on the interest rate. I knew that the greater the interest rate the more interest I will pay over time, so it made sense to me to pay off our highest interest debt first. Most people understand this since it’s basic math, so most people reason that they should pay off their highest interest debt first.
Most people think paying off debt is about math. If debt were about math, people wouldn’t go into debt. We wouldn’t borrow money at 20% interest rate to buy something if debt and finances were about math and reasoning, right?
My vehicle loan was my highest interest debt, so I started paying it off first. One of my credit cards was my smallest interest debts at 2%, so I didn’t pay it off right away even though that was my smallest debt. Part way through paying off my vehicle loan, I noticed I had enough in my account to pay off my low-interest credit card. I decided to do just that so that my credit card debt could be gone. It felt so good having a debt gone! I stumbled upon the feeling of winning by paying off a debt. This was nine years ago, and way before I knew about Dave Ramsey and his baby steps.
Now, I consider myself a very disciplined individual. My wife and I had dual incomes, no kids, and not all that much debt compared to the general population. My wife and I were going to pay off our debt in 6 to 9 months because we decided that’s what we’re going to do. But still, the feeling that you get when you pay off a debt makes you want to keep at it.
Even when you pay off a large portion of a debt, it registers as a win in your mind. You don’t even have to pay off the whole debt to get a psychological win. This is why the debt snowball works.
When you are working on paying off your smallest debt first, when you make a payment towards it, there is a better chance that it is a larger percentage of that debt. When you apply $1,000 to your $50,000 student loan, it doesn’t look like you moved the needle at all. But when you apply $1,000 to your $2,000 credit card debt, you paid off 50% of that debt, and it registers as a win in your mind. The next month you pay off the other thousand dollars of that debt. You won two months in a row! The more times you can win, the more you want to keep at it.
Even if you pay off 20% of a loan, you can see that you are making progress. You can’t see you are making much progress when you pay off 2% of a debt.
Debt Snowball vs Debt Avalanche Experiment
I experimented in Excel to see how much more interest would be paid on $40,000 total debt paying off the debts with the debt snowball method and the debt avalanche method.
I started with four debts. The lowest interest debt was 3% and the highest was 20%. $1,780 was paid each month toward the debts. It took 26 months to pay off all four debts with both the debt snowball and avalanche methods. The debt avalanche method saved less than $600 in interest. $600 is all! This means the debt avalanche was only a third of a month faster. They both took 26 months.
The first debt was paid off in month 17 using the debt avalanche method. The other debts were paid off in months 21, 25, and 26 using the avalanche method. Too many little snowballs rolling, and they all got to the end at the same time.
Using the debt snowball method, the debts were paid off in months 6, 14, 20, and 26. A debt was paid off about every 6 months. The first win was registered almost a year before the first win using the debt avalanche.
The highest interest debt was paid off in month 17 using the debt avalanche method. It was paid off in month 20 with the snowball method. The second highest interest debt was paid off in month 25 with the avalanche method and month 26 with the snowball method. There wasn’t really a difference when the high-interest debts were paid off since they were the two large debts. The difference was that the two smallest debts were paid off lots earlier using the debt snowball method.
If you are going to pay off your debt, it doesn’t matter which method you use, but you need to be very disciplined. This is why I recommend the debt snowball method. If you have been addicted to your debt for too long, use the method that gets you the wins early and often—the debt snowball method. This can help you stick with it and get out of debt.