Debt avalanche vs. snowball: a worked example with real numbers

The debt avalanche and the debt snowball are the two best-known ways to pay off several debts. People argue about which is better. With real numbers, the answer is usually less dramatic than the argument: the difference between the two methods is often a few hundred dollars. The difference between having a plan and paying minimums is often more than ten thousand.

The example household

We ran four common debts through LifeCalculator's debt paydown planner:

How the two methods work

Both methods follow the same rules. You pay every minimum each month. Any extra money goes to one target debt. When the target is paid off, its whole payment, minimum plus extra, rolls onto the next target. The payment on the target keeps growing, which is where the "snowball" image comes from. It applies to both methods.

• Avalanche: target the highest interest rate first. Here that means the Visa card at 27.9%, then the store card, the car loan and the student loan.
• Snowball: target the smallest balance first. Here that means the store card at $1,400, then the Visa, the car loan and the student loan.

The results

We gave the household $300 a month on top of the $810 in minimums, for a total debt budget of $1,110 a month.

The avalanche saves $108 over the snowball. Both finish in the same month. The real saving comes from having a plan at all: either method saves about $14,000 in interest and more than six years compared with paying only the minimums.

Why the gap is small here

The two methods only differ while they are aiming at different debts. In this example, the store card is both small and high-interest, and the snowball clears it in five months. After that, both methods target the Visa, then the car loan, then the student loan, in the same order. The only difference is a few months at the start.

The gap grows when the smallest debt has a low rate and a large debt has a high rate, for example a $900 medical bill at 0% next to a $12,000 card at 29%. In that case the snowball spends months paying off a debt that costs nothing, while the expensive card keeps growing. Try your own debts in the planner. It shows the difference in dollars for your situation.

Extra payments matter more than the order

Here is the same household with different amounts of extra money each month, using the avalanche:

Even with no extra money, rolling each paid-off minimum into the next debt cuts the payoff from 119 months to 71 and saves about $6,500. Every extra $100 a month then saves thousands more. The choice of method moves the result by a few hundred dollars at most.

Which one should you choose?

If you are confident you will stick with the plan, the avalanche costs the least. If you have been through payoff plans before and lost steam, the snowball's early wins are worth a small premium. Clearing a whole account in the first few months is real progress you can see. The best method is the one you will still be following in year three.

Two rules matter more than the order:

• Keep the total payment fixed. When a debt disappears, don't spend its minimum. Roll it into the next one.
• Stop adding new debt. A payoff plan can't keep up with a card that is still being used.

Enter your own debts in the debt paydown planner to see your debt-free date under both methods, then download the month-by-month schedule to Excel.