Learn the benefits and limitations of the popular debt elimination strategies: Debt Snowball and Debt Avalanche. Plus, how to decide which is right for you.

Consumer Debt Explosion

Americans are drowning in debt. According to the Federal Reserve, in the 15 years from 2005 to 2020 US consumers nearly doubled their non-mortgage debt.

In 2005, we collectively had about $2 trillion in non-mortgage debt. We started 2020 with $4.2 trillion. Consumer debt has outpaced population growth so fast that the average US household has 85% more non-mortgage debt in 2020 than they had just 15 years ago.

The bulk of that increase has been student loans. As I mentioned in a previous article, over $1 trillion of that increase came from a ballooning student loan debt.

There are macro-economic forces that are driving these trends, but that’s a rant for another soapbox.

Instead, let’s focus on getting you out of debt. If you’ve had enough and are ready to change, then you’ve come to the right place. And, if you feel overwhelmed and don’t know where to start, then you’re definitely in the right place.

The rest of this article is dedicated to helping you understand the benefits and limitations of the most popular debt reduction strategies. Keep reading to learn about the Debt Snowball and the Debt Avalanche, plus how to decide which is right for you.



Eliminating Debt: Two Main Methods

When you are getting out of debt, you need to decide which of your debts will receive the minimum payment, and which debts get extra payments. The difference between the Debt Snowball and the Debt Avalanche is how to decide which debt gets those extra payments.

The Debt Snowball: Defined

In the Debt Snowball you pay the minimum payments on all of your debts except for the one with the smallest balance.

Debt Snowball Benefits

The benefit of the Debt Snowball is that there is usually a pretty small debt that you can eliminate quickly. As a result, you can see real progress right away, which is great positive feedback.

The best debt elimination plan is the one you finish. And, seeing results early on can keep you motivated to finish. The benefits of the Debt Snowball are behavioral.

Debt Snowball Limitations

The limitation of the Debt Snowball is that your smallest debt may not have the lowest interest rate. Every extra dollar you put toward a debt with a lower interest rate increases the total interest you pay over time.

We often go into debt because money is tight. So, logically, it would make sense to allocate your precious dollars in the most efficient way. It takes more money to get out of debt using the Debt Snowball than it would using the Debt Avalanche.


The Debt Avalanche Defined

In the Debt Avalanche you pay the minimum payments on all of your debts except for the one with the highest interest rate.

Debt Avalanche Benefits

The benefit of the Debt Avalanche is that it is the least expensive way to get out of debt. By deploying your precious resources against your most costly debt, you lower the total amount of interest you would pay with any other strategy.

The benefit of the Debt Avalanche is purely financial.

Debt Avalanche Limitations

The limitation of the Debt Avalanche is that you cannot easily see how much better this plan is than the Snowball. If the debt with the largest interest rate is fairly large, it may take months to eliminate it.

Watching debt balances slowly decrease as months go by is nowhere near as satisfying as receiving a paid-in-full statement.


Sidebar: The Debt Flood

Just for fun, there is a third method that exists. It’s pretty much a garbage method that no one likes. But, I thought I’d include it just so you would know about it.

The Debt Flood is where you pay a little bit more than the minimum on all of your debts.

Let’s say you have five debts and your budget allows you to make the minimum payments on all of them, plus an additional $500 per month. The Debt Flood method would allocate an extra $100 to each of the five debts until one is paid off. Then, your extra payment is divided by the remaining four debts, and so on, until you’re debt free.

This method does not minimize the interest you pay. And, it takes forever to eliminate even the smallest debt. Therefore, the Debt Flood does not have behavioral or financial benefits.

And that is why the Debt Flood is garbage.


The Best Approach: Avalanche with 2 Snowballs

So, you have a variety of debts with a variety of interest rates. How do you decide?

The Mortgage Comes Later

First, if you have a mortgage, you should make the minimum payment on that until you have eliminated all non-mortgage debt. Let’s just set the mortgage aside for now and come back to it later. If you follow my 12-step plan to eliminate debt and build wealth, paying off non-mortgage debt happens in steps 4 and 8. Putting extra principal on the mortgage happens in step 12.

High-Interest Debts Go First

For non-mortgage debt, I like to break it into two groups: high interest and low interest.

Generally, high interest debt is often credit cards, payday loans, some types of IRS debt, high risk car loans and other unsecured debt. High interest debt usually has an APR over about 10%.

Low interest debt often includes most car loans, student loans, some kinds of credit cards, some types of IRS debt, and other secured debt. Low interest debt usually has an APR under about 10%.

For most people, two buckets is fine. But, if you have any debt with an astronomical rate, it should go first. Payday loans and unsecured high-risk personal loans can have interest rates from 30% to 300%, and they need to be eliminated as fast as possible. Sell a kidney if you have to (that’s sarcasm… kind of.)

A Debt Avalanche with Two Snowballs

The Debt Avalanche in this case is to bunch your debts together into groups with similar interest rates and attack the group with the higher interest rates first. That means you make the minimum payment on every debt in the low-interest group.

The First Debt Snowball

Attack your high-interest debt group with its own Debt Snowball. Make the minimum payment on all of your high-interest debts, except the smallest one. Pour every dollar you can find on the smallest high-interest debt and eliminate it as quickly as possible.

Then, when the smallest high-interest debt is gone, move on to the next-smallest debt in that group and repeat the process until all you have left is debts in the low-interest group.

After your high-interest debt group is gone, create a new Debt Snowball with your remaining low-interest debts and repeat the process.

Important Detour: Emergency Fund

Paying off debt is incredibly satisfying. There are few things better than receiving a Paid-in-Full letter from a lender that has been hanging around for years.

The other side of that coin is that few things are more demoralizing than making progress and having the rug pulled out from under you with some unexpected emergency. What’s the point of doing all that work to get out of debt and just getting dragged right back in?

That’s why I recommend pausing debt elimination before attacking either the high-interest or the low-interest Debt Snowballs.

If you don’t have an emergency fund, then make the minimum payment on every debt you have. Put any extra money you can find into a savings account until you have enough to cover one month’s expenses. You can use the Undetailed Budget to quickly calculate how much you need.

After you have set aside a 1-month emergency fund, then you can attack your high-interest Debt Snowball. Pour every resource you can find on those debts until they are gone.

Then, after your high-interest debts are gone, pause again. Build up a full six-month emergency fund. That way, no matter what happens, you won’t ever have to go back into high-interest debt again.

When the six-month emergency fund is tucked away into a savings account, then you can attack your second Debt Snowball.

Special Case: Secured Debt

Generally, when eliminating debt it is best to pay the minimum on every debt except the one that is getting your attention.

That means taking all income from all sources and using it to attack either your smallest or your highest-interest loan.

But, sometimes it makes sense to attack a secured debt outside the Debt Snowball or Debt Avalanche.

Secured Debt Defined

A secured debt is simply a loan attached to an asset. If you don’t pay back a secured loan, the bank will take ownership of whatever asset you attached to that loan. The most common secured loans are mortgages and car loans. You can also get secured loans for things like RVs, ATVs, and boats.

Alternatively, if you don’t pay back an unsecured loan (like a credit card), the bank’s only option is to sue you to recover the balance. When they win, the court will order you to pay back the money, but they won’t take your car or your house.

Paying off Secured Debt

Car loans and mortgages can be huge drains on your finances. When you build your Undetailed Budget, you may find that housing and transportation costs are keeping you from achieving your goals. That happens most often when people ask ‘how much do I qualify for’ instead of ‘how much can I afford’.

If you find yourself in that situation, it may make sense to sell the asset linked to one of your secured loans and use the money to reduce your total debt. But, there is a catch: a secured debt must be paid off when you sell the associated asset.

So, if you owe $30,000 on your car and you sell it, you must pay off the car loan immediately.

The net result is that your total debt will fall dramatically! And, that may be a good idea even if your car loan isn’t your smallest debt or even if it has a low interest rate.

That’s because a $30,000 car loan will have monthly payments of about $600. After you get rid of that car, you can use that extra $600 of monthly cash flow to supercharge your debt elimination plan.

Of course, you probably need to replace the car. That may mean you need to get another car loan. And, that’s okay as long as it is significantly less than your old car loan. If you sell a $30,000 car and buy a $2k to $5k car to get by, you have significantly improved your financial situation, even if you get a loan for the cheap car.

You have reduced your debt by at least $25k, and your Recurring Expenses by about $600 (plus your insurance will be cheaper). That’s great progress!


Final Thoughts

Americans have a love affair with debt. In fifteen short years the average non-consumer debt load of American households has increased 85%.

When you get ready to break up with debt, it can feel overwhelming. Over the years I have talked to so many people who said they didn’t start because they didn’t know how. There are too many options and too many moving parts.

If you do any research at all, you will find two camps of passionate debt-elimination gurus.

One camp wants you to see progress quickly. So, they recommend attacking the smallest debt first with the Debt Snowball.

The other camp wants you to minimize the amount of interest you pay. So, they recommend attacking the debt with the highest interest rate first.

You are more important than either of those groups. The only plan that works is the one you understand and stick to. The debt-free journey won’t do you any good if you don’t finish.

That’s why I like to combine the motivating influence of the Debt Snowball with the financial benefits of the Debt Avalanche.

And, whichever way you decide to go, be sure to build an emergency fund along the way. Emergencies happen. Make sure that debt is not your only way out.

What to Read Next

For more information, check out these articles that offer more detail about these topics. Enjoy!


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