Avalanche vs. Snowball Explained
When you have multiple debts, deciding which one to tackle first can be overwhelming. The two most popular methods are the Debt Avalanche and the Debt Snowball.
The Avalanche Method
How it works: You list your debts from highest interest rate to lowest interest rate. You pay minimums on everything, and put any extra money toward the debt with the highest rate.
The Pros: This is the mathematically optimal way to pay off debt. You will pay the absolute least amount of interest possible and become debt-free the fastest.
The Snowball Method
How it works: You list your debts from smallest balance to largest balance, regardless of interest rate. You pay minimums on everything, and put any extra money toward the smallest debt.
The Pros: Psychology matters. By knocking out small debts quickly, you get immediate "wins" that keep you motivated to stick to your plan.
The Magic of Extra Payments
When you only pay the minimum on a credit card, the majority of your payment goes toward interest, not the principal balance. This is why it can take decades to pay off a small balance.
However, any amount you pay above the minimum goes 100% toward the principal. By adding just $50 or $100 extra to your monthly payments, you drastically reduce the principal, which in turn reduces the interest charged next month, creating a compounding effect in your favor.
Frequently Asked Questions
What is the debt avalanche method?
The debt avalanche method focuses on paying off debts in order of interest rate, from highest to lowest. This strategy minimizes the total interest you pay over time, making it mathematically the fastest and cheapest way to get out of debt.
What is the debt snowball method?
The debt snowball method focuses on paying off debts from smallest balance to largest balance, regardless of interest rate. While it may cost slightly more in total interest, the psychological boost of clearing small debts quickly helps many people stay motivated.
Should I use avalanche or snowball?
If you need quick wins to stay motivated, choose snowball. If you want to pay the absolute minimum in interest and get out of debt mathematically faster, choose avalanche. Both methods are better than just paying the minimums.
How do extra payments help?
Any amount paid above the minimum payment goes entirely toward the principal balance. This reduces the balance that generates future interest, creating a compounding effect that can shave years off your payoff timeline and save thousands in interest.
Should I invest or pay off debt?
A general rule is to compare the interest rate of the debt to expected investment returns. High-interest debt (like credit cards at 15-25%) should almost always be paid off first. For low-interest debt (like a 3% mortgage), investing might yield better long-term results.
Methodology
This calculator assumes interest compounds monthly. The minimum payment for each debt is assumed to be fixed until the debt is paid off (though in reality, minimum credit card payments may decrease as the balance decreases). The "Extra Payment" is applied on top of the sum of all minimum payments. When a debt is paid off, its minimum payment is rolled over into the next debt in line according to your chosen strategy.