Pay Off Your Debt with the Avalanche Strategy

Last week, we explained the principles of the snowball approach to debt repayment. Today’s post will make much more sense if you read last week’s post first. As we mentioned previously, these strategies may help you pay off consumer debt even if you’re using income-driven repayment for your student loans.   

As a reminder, the snowball method focuses on methodically paying off small debts first.

The avalanche concept (sometimes called debt stacking) takes a different approach. Instead of focusing on the smallest debt, it first focuses on the debt with the highest interest rate, regardless of the balance owed.

The main benefit is that this technique saves more money by reducing the amount paid in interest.

The main disadvantage is that it doesn’t have the same psychological encouragement. With the snowball strategy, you pay off the smallest debts first, so you have a pretty quick gratifying feeling of decreasing your debt burden quickly.

Although psychology and encouragement are critical, the process is the same.

Make the debt with the highest interest rate priority A. Once debt A has been paid off, you roll that payment into debt B and so on.

Example

Let’s assume you have 3 debts:

• Debt A: $500 veterinary bill at 3% interest – minimum payment is $50
• Debt B: $2,500 credit card debt at 20% interest – minimum payment is $63
• Debt C: $7,000 car loan at 7% interest – minimum payment is $135

With the snowball method, debt A would be paid off first, then B, then C.

But with the avalanche approach, debt B is attacked first (20% interest), then debt C (7%), then debt A (3%).

Assume you can allocate $700 total to debt repayment each month.

In our example, in month 1, you would pay:

• $50 toward the vet bill.
• $135 toward the car loan.
• $515 toward the credit card debt ($700 – $50 – $135 = $515).

Once the credit card balance is paid off, you still have $700 per month to repay debts, but you don’t need the $515 payment for the credit card debt.

Therefore, you can add the $515 to the minimum payment for the car loan ($135). Since $515 + 135 = $650, this is what you allocate to repay debt B.

The remaining $50 is still used to repay the vet bill.

You can use an online calculator to help you with the math. One example is found toward the top of this article: www.nerdwallet.com/blog/finance/what-is-a-debt-avalanche 

Which strategy is better?

This is one of those never-ending debates in the debt world. Countless articles have been written about it.

Yet mathematically speaking, the two strategies provide roughly the same end result. Sure, there is a small difference in the end (which is a function of your total debt balance), but it’s probably not significant enough to lead you toward one technique over the other.

So which concept should you choose?

It really depends on your personality. The avalanche strategy saves more money on interest, but it requires some serious discipline. Since you may be attacking a larger balance first, you may not get the psychological “quick wins” that you would get with the snowball method.

So what should you do?

The good news is that, again, you don’t have to choose based on math.

This is not a sprint, this is a marathon. The psychological aspect is critical in this journey.

Personal finance is personal, so choose based on what motivates you the most.

Phil Zeltzman, DVM, DACVS
Meredith Jones, DVM
Co-Founders of Veterinary Financial Summit