How to Turn a Debt Snowball into a Debt Avalanche

The debt snowball has been popularized by financial guru Dave Ramsey as a debt reduction strategy for people with multiple sources of debt. The debt snowball is a fine strategy for those who need the incentive of eliminating the number of debt sources, but it is not the most effective way to manage debt. A more effective way to pay down debt that will save money and time is to use a debt avalanche.

The debt snowball strategy is to pay off debts by focusing on them one at a time from the lowest balance to the highest. This has the benefit of making the payer feel good about eliminating debt each time one is paid off and then using that money to work on the next debt. Like a snowball getting bigger as it rolls downhill, the payments get bigger as each source of debt is eliminated.

However, by using a debt avalanche instead, you will pay off your debt quicker and with less money going to interest. The debt avalanche improves on the debt snowball by factoring interest rates into your debt reduction strategy. Follow these steps to start a debt avalanche that pays down your debt quicker and with less interest.

Instructions

1

Collect your debt information

Make a list of all of your debt sources along with the following information: balance, monthly minimum payment and interest rate. For example:

SourceBalanceInterest Rate Min Payment
Debt A$5005%$25
Debt B$100010%$50
Debt C$200015%$100

2

Determine how much of your budget can go towards paying off debt. For example: $250 a month

3

Put your debt in order from highest interest rate to lowest.

Source Balance Interest Rate Min Payment
Debt C $2000 15% $100
Debt B $1000 10% $50
Debt A $500 5% $25

4

Pay the minimum amount for each debt every month, except the one at the top of your list with the highest interest rate. After paying the minimum for the other cards, pay the rest of your budgeted amount to the first card with the highest interest rate:

SourceBalance Interest Rate Min Payment Monthly Payment
Debt C$200015%$100 $175
Debt B$100010%$50 $50
Debt A$5005%$25 $25

5

Repeat the process every month, paying the most money to the debt with the highest interest rate and making the minimum payments to the other debts, until all of your debts are paid off.

6

If you applied the debt snowball to the simple above example you would have paid off your debt in 16 months and paid interest of $279. When you use the debt avalanche, you pay your debt in 15 months and only pay $235 in interest. That means getting out of debt one month faster and a savings of $44!