# Debt avalanche vs. debt snowball: When math trumps behaviour

John and Erica Mullen are in their mid-thirties and have two young children at home. Together they earn well over \$100,000 per year, but a combination of poor choices and unlucky circumstances have left them buried in debt.

Their substantial income affords them the luxury of not having to turn their life upside down by selling their home and vehicles; however, they will need to make some tough sacrifices in order to dig themselves out of this hole.

 Creditor Balance Rate Payment Interest-only Store credit card \$6,800.00 26.00% \$200.00 \$147.34 Consolidation loan \$23,000.00 8.00% \$430.00 \$153.34 Line of credit #1 \$20,000.00 6.34% \$105.67 \$105.67 Tax bill \$1,700.00 5.00% \$200.00 \$7.09 Car loan #1 \$36,000.00 3.90% \$460.00 \$117.00 Line of credit #2 \$16,000.00 3.00% \$40.00 \$40.00 Car loan #2 \$23,000.00 0.90% \$317.00 \$17.25 \$126,500.00 \$1,752.67

After a close look at their budget, the Mullens decide they can afford to put \$2,000 per month toward their non-mortgage debt. They want to know how best to allocate the extra cash so they can be debt-free faster and pay the least amount of interest.

Two popular debt repayment strategies are the debt snowball and the debt avalanche. Let’s look at each method and apply it to the Mullen’s situation:

### Debt Snowball

Dave Ramsey, American author of The Total Money Makeover, suggests an unusual strategy for getting out of debt by using something called the debt snowball method.

With the debt snowball, you’re throwing math out the window, focusing instead on the psychological advantage that comes from making progress with quick, successive wins.

Start by arranging your debts from lowest balance to highest. It feels better to rid yourself of your smallest debt, and the idea is that the snowball effect builds enough momentum so that you’ll be more inclined to stick with the strategy on your way toward debt freedom.

This chart shows how the Mullens would use a debt snowball approach to tackle their debt. Remember, they’re throwing an extra \$2,000 per month over-and-above their minimum payments:

 Creditors in Original Total Interest Months to Month Paid Chosen Order Balance Paid Pay Off Off Tax bill \$1,700.00 \$7.08 1 May-15 Store credit card \$6,800.00 \$405.61 4 Aug-15 Line of credit #2 \$16,000.00 \$301.35 11 Mar-16 Line of credit #1 \$20,000.00 \$1,572.90 19 Nov-16 Consolidation loan \$23,000.00 \$2,929.50 25 May-17 Car loan #2 \$23,000.00 \$390.39 30 Oct-17 Car loan #1 \$36,000.00 \$3,270.27 37 May-18 Total Interest Paid: \$8,877.10

You can see how the strategy works: the tax loan is killed off in the first month and from there the Mullens can focus on the department store credit card, which will be paid off three months later. Altogether it’ll take 37 months to pay off all their non-mortgage debt and the total interest paid over that time is \$8,877.10.

### Debt Avalanche

The debt avalanche method casts aside the behavioural aspects of debt repayment and instead sides with mathematical fact: you will pay less interest and become debt-free faster when you attack your highest interest debts first.

Related: The burden of debt

With a debt avalanche, you simply list your debts from highest interest rate to lowest – regardless of the balance or minimum payments due. Decide what you can afford to pay, over-and-above your regular debt payments, and throw all of that extra cash at your highest interest rate debt while maintaining the minimum payments on the other debts on your list.

 Creditors in Original Total Interest Months to Month Paid Chosen Order Balance Paid Pay Off Off Store credit card \$6,800.00 \$318.61 4 Aug-15 Consolidation loan \$23,000.00 \$1,202.20 12 Apr-16 Line of credit #1 \$20,000.00 \$1,656.95 19 Nov-16 Tax bill \$1,700.00 \$34.53 9 Jan-16 Car loan #1 \$36,000.00 \$2,464.86 28 Aug-17 Line of credit #2 \$16,000.00 \$1,211.00 33 Jan-18 Car loan #2 \$23,000.00 \$463.69 36 Apr-18 Total Interest Paid: \$7,351.84

By taking the debt avalanche approach, the Mullens get out of debt one month sooner and save \$1,500 in interest. Both methods kill off the store credit card in four months, while the avalanche takes care of the 8 per cent consolidation loan in just 12 months, instead of 25 months with the snowball approach. That decision alone saves the Mullens more than \$1,700 in interest.

### Final thoughts

There’s a clear winner when you compare the debt avalanche versus the debt snowball: The debt avalanche is the smarter method to get out of debt.

RelatedHow well do you handle debt?

But before you decide which debt repayment approach to take it’s more important to understand howyou got into debt in the first place. Know your budget and what you can realistically afford to throw at your debt. Then commit to adjusting your behaviour so that you can stop the debt spiral and reverse course.

Have you used the debt avalanche or debt snowball method before to get out of debt?

In addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on his site on May 6, 2018 and is republished here with permission.