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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.

Debt Avalanche vs. Debt Snowball

Debt Avalanche vs. Debt Snowball: When Math Trumps Behaviour

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 Mullen’s 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.

Related: Should you pay off your partner’s debt?

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 Mullen’s 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 Mullen’s 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 Mullen’s 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 percent consolidation loan in just 12 months, instead of 25 months with the snowball approach. That decision alone saves the Mullen’s 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 how you 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?

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17 Comments

  1. Matthew on May 7, 2018 at 9:39 am

    Ummmm…..pay your taxes first…you never want to mess with the taxman, they always get their pound of flesh.

    • Frito on May 7, 2018 at 12:46 pm

      They may always get their pound of flesh but they are usually the most accommodating of creditors as long as you are proactive. Contact them directly, let them know your financial situation, set up a repayment plan with them and stick to it. Much better than the credit card crooks charging outrageous interest. Having said that, it is best not to owe them anything at all

      • Matthew on May 8, 2018 at 9:51 am

        Delaying the payment of taxes should be a huge red flag for anyone. You may claim that they are the most accommodating of creditors, but how can you call someone accommodating when they have the power to seize and auction your home/property? Pay your taxes first, because if you cannot, you need to take a real hard look at how you are spending your money.

        And I am not sure how the credit card companies are ‘crooks’ when they advertise the rates charged, and also extend the credit at their own risk. It’s sound business acumen.

  2. Dividend Earner on May 7, 2018 at 9:40 am

    The 2 car loans are what is killing me when I look at the list. Those are really poor choices but you can do something about it.

    Trade the car for a cheaper one with more km and ride it as a reminder you are in debt. That should be your psychological reminder. I was once in my mid-30’s with 2 kids and 1 income and I never had loans on cars like that.

  3. Ken Barry on May 7, 2018 at 9:50 am

    You didn’t say they could afford to pay an extra$2000.00 per month you said they decided that they could pay $2000.00 per month towards their bills our side of their mortgage that’s only an extra $247.33 per month which is much more realistic than coming up with an extra 2k/month.

    Thanks
    Ken

  4. Rob on May 7, 2018 at 10:08 am

    As you mention in the title, there’s the behavior aspect. The reality is that is actually more important for most people than the math. Yes, for those who are disciplined, and can over-ride human financial behavior, the avalanche method is best. Unfortunately, it’s not something that most people do.

    I’ve found the debt snowball to be more effective on getting people out of debt. Yes, the interest paid can be higher – but the only way it makes a difference is if you’re assuming that both methods end with getting out of debt.

  5. Robert Gignac on May 7, 2018 at 10:23 am

    As you suggested – there is a clear winner from a “math” perspective – the problem for many (sometimes myself included…) – it’s rarely about math – it’s all about behaviour. If seeing fewer bills come in has them feeling psychologically better – the may in fact choose to speed up the process a year or two in… and as an earlier post suggested – they can always ditch the cars – because it’s seems obvious that behaviour and not math lead to those purchases.

    Keep up the good work at helping educate Canadians about personal finance.

  6. KC on May 7, 2018 at 10:41 am

    I agree that most of the time, it’s behavior that leads to getting debt under control. When I had a few debts, I decided to focus on the two smaller balances (debt snowball) as it seemed more achievable and it did help spur the momentum towards the other debt which I converted into debt avalanche.

    The first debt though would be the tax bill owing. That should always be first!

  7. Penelope Winters on May 7, 2018 at 12:23 pm

    I am a senior with a limited amount of available cash – and a lot of debt. I have chosen a combination of avalanche and snowball. Pay the highest interest first, then surprisingly the lowest one next, as it is an overdraft amount and that will mean I’ll have those funds available as emergency back-up. What is wrong with splitting payments between credit card debt so the amounts all show on the credit report as appreciably falling below maximum and thus enhancing the credit picture?

  8. Ginette on May 7, 2018 at 12:34 pm

    Great article:
    – shows how without tracking expenses debt can build up quickly and become difficult to manage
    – shows the 2 methods of getting out of debt and the importance of psychology in managing personal finances
    Personal finances is seldom about not being able to do the math. It is overwhelmingly about people’s behaviour.

  9. The Curious Frugal on May 7, 2018 at 1:04 pm

    I would choose the debt avalanche because math makes sense, but I have never been in this situation of high debt. I can imagine the stress of debt could alter your decisions. That store credit card interest rate really made me cringe.

  10. Nathan on May 7, 2018 at 5:31 pm

    Step 1: Sell off the higher cost vehicle and live with one + public transportation & biking for a while, then
    Step 2: Go to a bank and consolidate all that debt into one loan at a low(er) interest rate. Shouldn’t be too hard with an annual income that high.
    Step 3: Put all that $2,000 each month into the consolidated loan.

    Gets rid of the giant list of debt loans, plus you should pay it off faster because you’ll hopefully get a lower interest rate and you’ve removed one vehicle loan completely. Best of both worlds.

    • Paul N on May 8, 2018 at 11:25 am

      I agree with Nathan,

      Not sure how much equity is built into this couples house. I would try my best to set up a open LOC secured against the equity in the home. That would give you a much more favorable rate and consolidate everything into there. You could pay extra into it whenever you wanted with no penalty. Put low credit limits on any credit cards you may keep.

      Too many people spend way too much on cars. The car industry has successfully marketed itself to putting people into needless great debt. Get a reliable used car, save your money and use it to build your nest egg and pay off your mortgage. All other debt is BAD debt. Once you are in good shape in the future, if you really still need one of those shiny baubles, then buy a newer car that won’t drop you into a hole again.

    • Ben on May 8, 2018 at 2:34 pm

      Consolidate all of the debt into one loan with a lower interest rate and pay $3752 towards this balance each month. At 4%, it would be paid off in 36 months with total interest of $7903; at 3% it would be paid off in 35 months with total interest $5814. Possibly use the equity in your house to get the credit? Or a rich uncle??

  11. MrsK on May 7, 2018 at 6:31 pm

    If you did choose to do Dave Ramsey’s snowball method, then you would move the tax bill to the top. And you would get rid of both of those cars. His rule is you can only keep them if you can pay them off within two years. And you would cut your lifestyle down to nothing in order to be out of debt a whole lot faster. People can tolerate sacrifice if they can see the end in sight. Yes, the math works. But life is about more then math. The debt snowball is successful because it’s about changing the behaviours that got you into the mess in the first place.

  12. Alan5948 on May 8, 2018 at 10:10 am

    Those two huge car loans are the killers, and will be for the foreseeable future unless the Mullens can somehow get them cleaned up. I agree that you should never get a car loan unless you can pay it off in two years or less. What happens if you have a 6 or 7 year car loan and the car quits or is wrecked after 3 or 4 years or less? The debts can be paid off, but only with a strong commitment never to get behind the consumer debt 8- ball again.

  13. C. G on September 29, 2018 at 11:19 am

    So I have a question.
    What if I take any of the 2 methods….but I don’t have extra income. Actually I only have money to make the minimum payments.
    Someone said it’s better to grab the minimum payments to every single creditor and put it into one until its payed off?
    So basically you pay only one creditor and forget all the other ones….not even the minimum payment. Is that an option.
    Assuming your credit is already going down hill?

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