Ultimate Guide to Paying off Debt – Debt Snowball or Debt Avalanche?

To clear debt, there are two really good options I recommend, and they use much the same process. 

Roll the Debt Snowball

OK, here we go with what, to my mind, is the most effective way to clear debt I’ve ever come across. Pull out your list of debts, listed with the smallest outstanding balance first. And by now you should have identified how much each month you’re going to put against your debt ON TOP of the minimum payments.

This method is called the debt snowball. You know how when you start to roll a snowball, it starts small and then gets bigger as it gathers more snow until you have a snowball big enough to act as a snowman’s body? That’s what’s going to happen to your debt payments. It works like this:

You will pay minimum payments to all of your debts except the smallest one. All of the rest of your debt-busting monthly budget you will pay against the smallest debt until it’s gone.

Then you move on to the next smallest debt and now you’ll have all the money you were paying against that smallest debt, to put against the next smallest, PLUS the minimum payment you were already making there. The snowball just got a little bit bigger!

When each debt is paid off – close the account. Cut up the credit or store card, call the bank and close the overdraft. Don’t give yourself the option of building the debt you’ve just paid off back up again – how demoralising would that be? Make it impossible by closing the accounts.

You keep doing that; working through your debt, smallest first. By the time you get to your last debt, your entire monthly debt-payoff budget is being directed there – the snowball is at its largest and is having its biggest effect.

So why pay off the smallest debt first? Surely it makes more sense to pay off the debt with the highest interest first? Well, it depends what you mean by sense. It makes the best financial sense, for sure. But money is, for many people at least, a psychological/behavioural/emotional issue, rather than a problem of maths.

For most of us, if we really understood the maths behind debt, and the inverse of that, which is the maths behind wealth-building, we would be much more disciplined about our financial management than we are.

If you feel like you’re more motivated by maths than emotion, then the next point will help you, but for most of us, the quick win of paying off a small debt quickly is of incalculable psychological benefit. That quick win is seriously motivating, right at a time when we want to be motivated to the max.

Ride the Debt Avalanche

Whenever I talk about the debt snowball – which was made popular by American money-management legend Dave Ramsay – I get people complaining that it makes ‘no sense’ to pay off debts in order of size rather than interest rate.

Again, behavioural sense trumps financial sense in my opinion, but in case you’re one of these people, then you need to Ride the Debt Avalanche. This works exactly the same way, but instead of paying the smallest debt first, you pay off the highest-interest debt first, while paying minimum payments on everything else.

You’ll almost certainly pay less interest overall doing it this way, but are arguably more likely to fall off the wagon – though I have no evidence to support that. I think it very much comes down to which way you’re wired.

The vast majority of us, I reckon, are wired for those quick wins, which is why the snowball is so effective. But if you’re more motivated by the maths and the numbers, then go for the debt avalanche and pay the highest interest debt first.