Snowball vs. avalanche: Two proven approaches to paying off debt

The lowdown:

• Snowball focuses on your smallest balance first
• Snowball can give you quicker wins that help you stay motivated
• Avalanche focuses on your highest-interest debt
• Avalanche can save you money on interest
• The best approach is one you can realistically stick with

Vancouver Island winters are usually more wet than white, but snowballs and avalanches are still helpful ways to think about paying off debt.

It can be hard knowing where to start. If you have, for example, a credit card balance, line of credit and maybe a personal loan, where should you put any extra money you have available to reduce your debt?

You could start small—the snowball approach. Or you could go after the debt costing you the most in interest—the avalanche approach. This article takes a look at how they work, and how to decide which is for you.

Know what you owe

Before deciding which debt to tackle first, you need the big picture view.

1. Make a list of each debt, including the current balance, interest rate, minimum payment and any current payment you make. Include credit cards, lines of credit, personal loans, your mortgage and other money you owe.
2. Work out how much extra you can realistically put toward debt each month after your household and other expenses are covered, and after any monthly savings have been deposited. Even if it’s only $50 or $100, that gives you a set amount to plan around.

The debt snowball: Start small and build momentum

With the snowball method, you rank your debts from the smallest balance to the largest, without considering the interest rate. Here’s how it works:

1. List your debts from the smallest to the biggest
2. Make the required balance payments on each debt
3. Direct the extra money you can afford toward the smallest debt first—the lowest hanging fruit
4. Once that one is gone, move your extra money toward the next debt

Instead of tackling several balances at once without feeling like you’re getting anywhere, this approach lets you completely eliminate one debt faster. As each balance disappears, the amount you can put toward the next one gets bigger.

That’s the snowball.

An advantage of this approach is that you can see results fairly quickly. When it comes to your mental health wellbeing, those small wins can matter. Maybe you maintain a to-do list? Many who do like to tick off small, easy things first to feel like the day has started productively. This is similar. In fact, research from the Journal of Marketing Research found that paying off individual debts one by one was associated with successfully eliminating debt. This suggests that completing smaller goals can help motivate people to keep going.

A downside can be that if your larger debts have higher interest rates than your smaller ones, you could pay more interest overall.

Research from the Journal of Marketing Research found that paying off individual debts one by one was associated with successfully eliminating debt.

The debt avalanche: Start with the highest interest first

There are easy ways to save money. Could you cook at home a little more this month? Pause a streaming service you haven’t watched lately? Put off a few non-essential purchases until work picks up?

If possible, consider putting a little into savings before spending on anything else. Even $25 from every paycheque via automatic deposits soon becomes a few hundred dollars. That savings habit can ensure you always have a cushion for extra slow months if needed—again to ensure the essentials get paid.

Make busy months work harder

With the avalanche approach, you focus on your highest interest debts first, regardless of the balance. Here’s how it works:

1. List your debts from the highest interest rate to the lowest
2. Make the required balance payments on each debt
3. Put your extra money toward the debt with the highest rate
4. Once that’s paid off, move your extra money to the debt with the next-highest rate

Prioritizing your highest-interest debts in this way means you pay less interest, which can help you become debt-free sooner. The idea is that you start with the highest interest rate (the mountain peak), and work your way down to the lowest (the bottom of the mountain). As each is paid off, you move your extra debt repayment money to the next highest rate.

That’s the avalanche.

There can be a downside in terms of staying motivated. Your first debt to pay off might have a large balance, meaning you may not see the quicker progress from paying down smaller debts first.

Snowball vs. avalanche in action

Here’s an example to show what we mean. Say you have:

• $1,000 on a credit card at 12% interest rate
• $3,000 on a credit card at 20% interest rate
• $6,000 on a line of credit at 8% interest rate

After making the required payments to each balance, as well as paying your essential expenses and ideally squirreling away some savings, you find you have $200 a month extra available to pay down some debt.

• The snowball approach: You put that extra money toward the $1,000 balance, potentially clearing that first debt in three to four months for an encouraging quick win.
• The avalanche approach: You target the $3,000 credit card debt at 20% interest first. It takes longer to get rid of this debt, but by reducing your most expensive balance first you can save on interest.

If you manage to clear all three debts in about two years, instead of five, for example, you could save over $2,000 in interest or more, depending on your balances and interest rates.

So, which is it: snowball or avalanche? Or both?

We often talk about forming good money habits, so consider starting with the approach most likely to keep you motivated to pay down debt.

Seeing a balance disappear, for example, can give you the motivation you need to continue. There’s nothing like crossing something important off a list! This can be especially useful if you’ve started debt repayment plans before but found it hard to keep going. If this sounds like you, consider the snowball.

On the other hand, if you’re confident you can keep going without those quicker wins, consider the avalanche approach and think of the money you can save.

Of course, you can do a bit of both: Get rid of a small balance quickly for that quick win, then focus on your highest-interest debt. What matters is your debt is starting to disappear.

How to get started with paying down debt

Here’s how to get started today. Got a pen and paper or notes app handy? List what you owe, choose the first debt you want to focus on—smallest amount or highest interest—and decide how much extra you can afford to pay into that balance each month. You can also consider automating the debt payment so the money doesn’t get used for something else and you don’t have to remember to do it.

When that debt is gone, try to redirect that extra debt repayment amount into the next debt. Whether you choose snowball or avalanche, or a mix of both, the trick is to keep going. If something unexpected knocks you off course a bit, adjust your plan rather than abandon it as it might be tricky to build up the same momentum again.

If this all sounds complicated, that’s because it can be. Remember, a CCCU advisor can help you crunch the numbers, understand your best options and come up with a realistic debt repayment plan.’ve squirreled away enough to cover your tax bill can be a big stress reliever. If you saved too much, consider that a bonus! And you never have to wonder whether the money is available because it isn’t mixed in with your everyday spending.