The Snowball and Avalanche debt management and repayments strategies are two popular terms when you read about debt management. The premise is simple, when you accumulate debt you need a way to pay it off before it gets out hand. Before too long, interest on the money borrowed can nearly double balances. Creditors can start to call if you miss payments and you’ll eventually owe more than your worth. If you can avoid bankruptcy, you definitely want to.

Even if you aren’t headed down a path of destruction you still want to be responsible and pay your debts off. There are a couple strategies that help make this easier for you.  The Snowball method has you pay your smallest balances first while the Avalanche method has you pay highest interest first. When you are deciding debt management and repayment strategies it is best to look at both approaches and see which one works best for you.

It is important to remember you must continue paying the minimum balance on your debt. Regardless of the method you chose you do not want to destroy your credit to accomplish any of the goals. Missing payments counteracts either plan. Also, be aware that both Snowball and Avalanche both require extra payments to go towards debt. If you do not make extra payments then you are just paying the debt.

Snowball Method (Lowest Balance First)

The snowball method means paying off small debt first. This method is good for creating momentum because it pays off debt quickly and provides emotional wins. The emotional stimulus keeps you going in this debt repayment strategy.

For example, assume you have 5 credit accounts with varying balances and minimum payments as below:

Credit cards issuers usually set their minimum payments to $25 or 1% to 3% of the balance plus interest incurred on charges and any fees for the period whichever is greater.

Generally when you use the Snowball method you write down your debt in order of smallest to largest. However, we are using this example with two methods so the debts are listed out of order.

The balance on the $500 credit card (Credit Card 1) is small. If you focus your extra income to paying this balance off first, you will cut your accounts payment accounts from five (5) to four (4) relatively quickly. Let’s assume you have an extra $100 to put towards debt.

Credit Card 1

The first credit card gets paid off in $500 / $125 approximately 4 months. You will have a final payment of a little less than $18, which is the total interest you will pay on the $500. But, it is worth it if you come up with the extra $18 this last month and move on to the next credit card.

If you were to only pay the minimum payment every month it will take 24 months to pay off the balance.  Also, you would have to pay $87 in interest.

• Your total savings here are 20 months and $69 in interest.

Credit Card 2

Once you have Credit Card 1 paid off, you can devote more money to the Credit Card 2. During the four (4) months of making minimum payments, you will have reduced the balance to $4,796. You will have paid $295 in interest.

But, you now have an extra $100, the $25 minimum payment of Credit Card 1, and the minimum payment of $124 on Credit Card 2. This allows you to put $249 towards the $4,796 balance. By adding the extra payments Credit Card 2 will take $4,796 / $249, approximately 23 months to pay off. The additional interest paid on this card is about $894.

If you were to continue making the minimum payments every month it will take you another 4 years and 10 months or 58 months to pay off this card. Also, the total interest during this is time is an additional $2,373.

• Your total savings here are 35 months and $1,481 on interest.

Loan 1

The third account with the smallest balance is the $7,500 loan. Paying off the first two credit cards took 27 months you now have 93 months or 7 years and 9 months left on Loan 1. So far, you have paid $692 in interest.

Loan 1 now has a balance of approximately $6,094 after the 27 months of $78 payments. Now you can add an additional $249 to the $78 for a total of $327. Rather than this account taking another 93 months to pay off, you can now pay Loan 1 off in just 20 more months! The additional interest you will pay is $236. This brings the total interest on this account to under $928.

If you were to continue making the minimum payments over the next 93 months you will pay another $1,136 in interest.

• Your total savings here are 73 months and $900 in interest.

Loan 2

The next account you would tackle is Loan 2 with a balance of $9,800 and payments of $183 over 60 months. By the time you start to focus on this account 47 months have passed. At 47 months, your balance is about $2314 dollars and you will have paid $1101 in interest.

You can now add the $327 a month to payment of $183 for a total of $510. Instead of having to pay on this account for another 13 months, you can pay it off in just five (5) months. And you will only pay another $25 in interest. This brings the total interest to under $1126.

You would have to pay another $53 in interest if you continue the minimum payments for the next 13 months.

• Your total savings here are 8 months and $37 in interest.    

Your Progress So Far

Let’s take a little time to look at your progress so far. After 4 years and 4 months of payments, you have now paid off two (2) loans and two (2) credit cards. If you did not use this Snowball method you would still have over 5 years on one of your loans payments and would still be making payments on one of your credit cards.

While the savings on the final loan are not as great in terms of interest, you are saving $385 dollars a month of debt from Loan 1, Loan 2 and Credit Card 2.

Paying Off the Last Loan

You are now ready to tackle the student loan. Previously when schools loans had interest rates south of 2% perhaps paying these over time was acceptable. Now, these are not loans you want to keep around. When this account becomes your focus, you are 52 months in which leaves another 248 months of payments. Your balance on this loan is approximately $20,320 after 52 months. By this time, you have paid approximately $6,289 in interest.

Continuing to use the Snowball method you can add the extra $510 to the $154 you are already paying. Doing this allows you to pay off the student loan in about 33 months or two (2) years and nine (9) months. The additional interest you pay is $2,077. By this time, you have paid a total of 86 months of payments and $8,366 in interest.

• You total savings here are 214 months and $15,610.

This is where you see the magic of proper debt management and the first of the repayment strategies. Using this method allows you pay off all your debt in 85 months or 7 years and 1 month. All you had to do was add another $100 to your normal payments and keep rolling over the minimum payments due.

Avalanche Method (Highest Interest First)

Rather than appealing to your emotions, the Avalanche method is more about the math making the decisions. Therefore, if you like to calculate your moves on money rather than seeing “quick” results the Avalanche method is for you.

Because you might not see results as quickly, it’s possible you will want to create your own milestones and celebrate when you achieve them. Generally, you start the Avalanche method by listing all your debts in order by highest to lowest interest rate. For this example we are going to use the same numbers from above.

This example will focus more on the interest rate column than the payment amount. Therefore, you will start by paying Credit Card 2 because it has an interest rate of 17.74%. To keep things equal, we will add the $100 extra towards paying your debt using this method as well.

Credit Card 2

When you add the $100 extra dollars to Credit Card 2 it gets paid off in $5,000 / $224 approximately 27 months. You will have paid a little under $1113 in interest. Again, if you pay the minimum on this card the total pay off is 5 years 2 months and $2,664 in interest.

• Your total savings here are 35 months and $1,551 in interest.

Credit Card 1

The next highest interest rate is Credit Card 1 at 16.24%. With a balance of $500 at a rate of 16.74% and paying the $25 minimum means the card gets paid off 24 months. You have also paid $87 in interest.

Special Note: Because you pay this card off in 24 months when paying the minimum of $25, you can now add the $25 minimum balance to Credit Card 2 during this time. This means, the last 4 months of payments actually becomes 3 months.

• This increases your total savings to 35 months and $1,559 in interest.

Because the balance on credit card 1 is so small, you might consider paying this card off regardless of the strategy you use. This will allow for a quick win and allow you to increase the amount of money you pay Credit Card 2 faster.

Student Loan

The next goal is the student loan at $22,000. After 27 months, the balance is about $21,190. You will have paid $3,328 in interest.

However, if you add the extra $249 (extra $100, Credit Card 1 $25 and Credit Card 2 $124) to the current $154 minimum payment you will have $403 to make payments.

By adding the extra money on the 27^th month (2 years and 3 months in), you can have the school loan paid off in a total of 80 months (another 4 years and 5 months).

The total amount in interest paid is over the next 4 years and 5 months is $4,080. This brings your total interest to $7,408.

• Your total savings here is 220 months, and $16,568 in interest.   

Special Note: Notice that Loan 2 has a five (5) year term. Therefore, after 60 months total you will have paid off Loan 2 which has a monthly payment of $183. The total interest you paid on this loan is $1,163. The payoff of Loan 2 means you can start making additional payments on your school loan.

Adding the payments of $249 you bring the current balance on the school loan to $11,003. This is after 33 months of payments. You also have paid an additional $3,087 during this time.

If you add the additional $183 from Loan 2 to the $249 from the previously paid off accounts, you can begin making payments of $586 to your school loan. This will pay the loan off in 20 months and you will pay an additional $668 in interest.

• This brings your total savings to 200 months and $12,813 in interest for the school loan.

Loan 1

Using the Avalanche method, after 80 months or five (6) years and three (8) months you will have paid off both credit cards, Loan 2 and the student loan. At this point you have 40 months remaining on Loan 1 and a balance of approximately $2883 and you have paid $1601 in interest.

Now you can add all the extra payments from the other sources, an additional $512, to the payment of $78 making it $590. Paying $590 will allow you to pay off the balance of Loan 1 in five (5) months. You will also only pay an additional $33 in interest.

• This brings your total savings to 35 months and $194 in interest.  

The end result is after 85 months you will have paid off all your accounts. When comparing the two accounts you will notice that although the payoff time is the same, the amount of money in interest you save is larger than using the Snowball method.

Snowball And Avalanche?!? Which is Better?

Snowball and Avalanche are both good strategies. But, to answer which method is best is to say whatever strategy you are more comfortable with.  You can use this provided spreadsheet to help you decide which method you prefer to use.  Regardless of which you choose, when you decide to tackle your debt, keep making the extra payments.To help make your decisions easier, download the Debt Management Strategy here: