Debt Snowball or Debt Avalanche? Two Payoff Plans Run on the Same Four Debts

Two financial writers walk into a kitchen. One says: pay off the highest interest rate first, because mathematics does not care how you feel. The other says: pay off the smallest balance first, because you do. They have been arguing about this for years, and each is half right. The interesting question is not which of them wins the debate. It is how much the disagreement is worth, in dollars, on a real set of debts.

So let us run the experiment. This post sets out the two methods, applies both to the same hypothetical four debts, and counts the difference. Everything here is general information. The debts are invented, the rates are illustrations, and nothing below is advice about your own situation. For that, a qualified professional who has seen your actual loan documents is the right call.

Definitions

Terms first, because the argument is usually lost in vague ones.

The debt snowball pays the minimum on every debt, then sends every spare dollar to the debt with the smallest balance. When that debt is gone, its payment rolls onto the next smallest, and so on. The payments grow as they pass from debt to debt, hence the snowball.

The debt avalanche pays the minimum on every debt, then sends every spare dollar to the debt with the highest interest rate, regardless of its size. When that debt is gone, its payment rolls onto the next highest rate.

The two methods share the same engine. In both, the household commits a fixed total monthly payment, and in both, a freed-up minimum is never spent elsewhere; it is added to the target debt. The only difference is the order. That is the whole disagreement. One word: order.

Interest accrues each month on the outstanding balance, at the annual rate divided by twelve. A lower balance at a high rate means less interest next month. That is why order has a price.

The four hypothetical debts

Picture a household in Ohio with four debts. It is hypothetical. Nobody is being described.

The total owed is $1,500 plus $3,200 plus $6,000 plus $11,000, which is $21,700. The minimums add to $60 plus $80 plus $140 plus $230, which is $510 a month. The household can afford $200 a month more, for a fixed total payment of $710.

Under the snowball, the order is by balance, smallest first: A ($1,500), then B ($3,200), then C ($6,000), then D ($11,000). Under the avalanche, the order is by rate, highest first: B (24%), then C (18%), then A (12%), then D (6%). The orders differ in a useful way. Debt A is the smallest balance but only the third-highest rate, so the two methods disagree about it from the very first month.

What happens under each plan

I ran both plans month by month, with interest computed on each balance monthly at one-twelfth of the annual rate, payments made after interest was added, and every freed minimum rolled onto the target. The results follow.

The avalanche wins on paper, and the margin is $210.31 in interest and one month of time. It is not nothing. But it is, I would argue, smaller than the people who argue about it for a living would lead you to believe.

Why so close? Because the household's debts are spread across a fairly narrow band of balances, and because the spare $200 is a modest fraction of the whole $710. When the extra money is small relative to the total payment, the order in which it is applied has a limited effect. The difference grows when the extra payment is large and when the highest-rate debt is also a large balance. In this example it is neither.

Two milestones are worth a look. After twelve months, the total remaining under the snowball is $15,526.35, and under the avalanche it is $15,421.47, a gap of $104.88. After twenty-four months, the figures are $8,302.65 and $8,116.58, a gap of $186.07. The avalanche is ahead at every checkpoint, as arithmetic requires. But the snowball has already eliminated two whole debts by month 17, while the avalanche has eliminated one.

That last fact is the heart of the matter.

The steelman for the snowball

Let me state the case for the smallest-balance-first method as its defenders would state it, and state it fairly.

The snowball's defenders say that money is not a spreadsheet problem. It is a behavioural one. A household in debt is, almost by definition, a household that has not yet found a method that works. The thing most likely to end a payoff plan is not the extra $210 in interest. It is the feeling, in month nine, that nothing is happening. A plan that clears the first debt in month 6, and another in month 17, sends a message: this is working, keep going. A plan that grinds through the biggest-rate, biggest-balance debt for fourteen months before anything disappears sends the opposite message.

Their further claim is empirical, and I will not pretend to settle it here. They say that people who see debts vanish quickly are likelier to stay with the plan, and a plan abandoned in month eleven saves no interest at all. A method that is a little worse on paper and much likelier to be finished is, in the real world, the better method.

I find that argument serious. It does not require anyone to be foolish. It requires only that human beings are the ones doing the paying.

The case for the avalanche, in numbered premises

Now the other side, argued as I would argue it.

1. Interest is the only cost of debt. The principal you owe is yours to repay in any case. The cost of the loan, the thing that makes you poorer for having borrowed, is the interest.
2. Therefore the best plan minimizes interest paid. If two plans have the same monthly payment, the plan that costs less in total is better by definition.
3. Each dollar sent to a 24% balance saves more than the same dollar sent to a 12% balance. A dollar that retires 24 cents of annual interest beats a dollar that retires 12.
4. So, in order, the highest rate first. The mathematics here has no exceptions. It is the cheapest path through any set of debts when the payment is fixed.
5. The snowball's advantage is psychological, and psychology can be trained. A person can be taught to track the interest saved, rather than the number of accounts closed. Calling a method "better because it feels better" is an admission that the other method is the better arithmetic.

That is a strong case, and the numbers above bear it out: $210.31 less interest, one month sooner. If the household is the sort who will stick with either plan, the avalanche is correct, and the choice is not close.

Where the two arguments meet

The first thing to notice is that the two plans are not rivals on principle. They agree on almost everything. They agree that the household should pay at least the minimum on everything, since a missed payment brings fees, penalties and damage to a credit record. They agree that a fixed total should be paid each month and that freed-up minimums should roll forward. They agree that new borrowing should stop while the payoff runs. They even agree on the last debt, in this example. They differ on order, and the order costs $210.31 over thirty-six months, about $5.84 a month.

The second thing to notice is that the right choice depends on a single question: which failure is more likely for this household? If the more likely failure is paying too much interest, choose the avalanche. If the more likely failure is giving up, choose the snowball. A household that has tried and failed to pay off debt before is, by the evidence of its own history, in the second group. A household that has never tried is a coin flip, and the cheaper plan is the sensible default.

There is also a hybrid that works for many people. Start with the very smallest debt, if it can be cleared within a few months, to get the early victory. Then switch to avalanche order for the rest. In this example, that would mean clearing A first (month 6, as in the snowball), then attacking B, then C, then D. It is not the cheapest plan and not the fastest win. It is a compromise, and compromises are underrated, as every legislator who ever passed anything knows.

Who each method suits

The avalanche suits the household with a high-rate, large-balance debt that is costing real money each month; the household that is comfortable with numbers and tracks them; and the household whose debts are spread across a wide range of rates, because the wider the range, the bigger the savings.

The snowball suits the household that has started and stopped before; the household with many small debts, where clearing several quickly frees up cash flow and simplifies the bookkeeping; and the household that has been worn down by debt and needs evidence, early, that the plan is real.

Neither suits the household that has not first protected itself against the next surprise. A payoff plan with no cash reserve is a plan waiting for a broken transmission to convert it back into new debt. That is why the order of priorities matters, and why Why the Emergency Fund Comes Before Every Other Money Goal You Have makes the case for a starter fund before the payoff plan begins in earnest.

And neither works without a budget that produces the extra $200 in the first place. If the monthly plan is not already balanced, the plan below the line will not hold. See Give Every Dollar a Job Before the Month Starts, the Zero-Based Budget for the method.

What the Founders thought about debt

Americans have been uneasy about owing money for as long as there has been an America. The Book of Proverbs, which the founding generation read as a matter of course, says in chapter 22, verse 7: "The rich ruleth over the poor, and the borrower is servant to the lender." That sentence is the moral heart of the matter. Debt is a kind of servitude, a claim on your future labour, and a free person ought to hold as few such claims against himself as he reasonably can.

Benjamin Franklin made the same point in the pages of Poor Richard's Almanack, and in the 1758 preface that came to be called The Way to Wealth, he warned his readers against the quiet cost of buying on credit. Thomas Jefferson went further, and held that one generation had no right to bind the next with its debts, a principle he thought important enough to propose to James Madison in 1789. He was not heeded, and the national debt today is a monument to that fact. You can watch it for yourself at the national debt clock.

The point for a household is smaller but related. A family that pays down its own debts is not performing an act of arithmetic. It is exercising a form of self-government. It is reclaiming a claim on its own future. Whichever method it chooses, that is what the exercise is for.

Two warnings

First, neither method is the only way out. A household may have debts with unusually favourable terms, such as a low fixed-rate loan, where paying only the minimum and directing money elsewhere is perfectly sensible. Whether to do that depends on the rate, the alternatives and the household's circumstances, and I cannot answer it for you.

Second, neither method cures the cause. A household that pays off $21,700 and then returns to the card at the same spending rate has run a very expensive treadmill. Debt is usually a symptom, and the treatment is a plan for spending. The mechanics of carrying a balance and the myths people hold about it are tested in Carrying a Balance Builds Credit and Six Other Borrowing Myths, Tested, and how payment history shapes the score that follows you around is in How a Credit Score Is Built and Why Paying on Time Beats Every Trick.

The case in brief

1. The snowball pays the smallest balance first and the avalanche pays the highest rate first; every other part of the plan is identical.
2. On the same four hypothetical debts, owing $21,700 in all and paying $710 a month, the avalanche finishes in month 36 with $3,751.51 in interest, and the snowball in month 37 with $3,961.82, a difference of $210.31.
3. The snowball's early victories, the first debt gone in month 6, are its real advantage, and they matter if they keep a household in the plan.
4. Choose the avalanche if you are confident you will finish either plan, and the snowball if you have started and stopped before; a hybrid is a respectable compromise.
5. Whichever method you choose, build a small cash reserve first and stop adding new debt, or the plan will not hold.

What you can do: this week, list every debt you have with its balance, rate and minimum payment on a single page, and write down which failure, overpaying interest or giving up, you are more likely to suffer.