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There are two main algorithms for paying off debt;

  • The snowball, where you put your extra money towards the smallest debt to knock them off the board faster
  • The avalanche, where you put the extra money towards the highest interest debt to reduce the total amount of interest paid.

Received wisdom is that the avalanche is superior in terms of total cost. However, a recent question of mine got an answer suggesting that the debt snowball works by using the freed up cash flow from the smaller debts to clear your bigger debts faster. I have read other answers that make the same claim. Further, I can't find a blog post that explicitly discusses the cash flow angle so I'm wondering if that has been accounted for.

Does this actually work out? Does freeing up your cash flow actually boost the speed of debt payment?

mhoran_psprep
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HAEM
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    Related: Why would anyone want to pay off their debts in a way other than "highest interest" first? – Ben Miller Jun 29 '23 at 18:33
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    Do you think that in the avalance method you don't use the freed up cash from the larger debts to pay off the smaller debts, once you've completed the larger debt? – Brondahl Jun 30 '23 at 08:17
  • @Brondahl the cash does get freed up slower in the avalanche method, regardless. This does complicate the math a bit. – HAEM Jun 30 '23 at 08:23
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    Ah, I see. Yes, it makes the maths more complex, but (as the other answers have detailed) yes it has been accounted for, and no it doesn't change the answer. – Brondahl Jun 30 '23 at 09:32
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    "Received wisdom is that the avalanche is superior" No, simple math will tell you this. – Glen Yates Jun 30 '23 at 14:21
  • In this case, conventional wisdom is conventional because it is wise. – keshlam Jun 30 '23 at 15:04
  • Don't forget to consider early repayment fees if applicable. – gerrit Jun 30 '23 at 16:43
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    If the smaller debts are very small relative to the larger, higher-interest debt(s), it's not going to matter much if you clear them first. But if your smaller debt is 30K at 5% and your larger debt is 60K at 8%, you are wasting a significant amount of money using the snowball money. No one should 'feel good' doing something so silly. – JimmyJames Jun 30 '23 at 17:55
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    Also, anyone following Dave Ramsey's advice should consider his potential conflicts of interest. I mean, are you really sure you want to take advice from someone who gets kickbacks from financial advisors and pushed back against those advisors being forced to act as fiduciaries for their clients? – JimmyJames Jun 30 '23 at 18:03
  • Math is proved., not Received from On High. For that you get a -1. – RonJohn Jul 01 '23 at 05:02
  • Keep in mind that for many people, the two methods are nearly identical. The smallest debts have higher interest (credit card balances, personal loans), and the larger debts have lower interest (car loans, student debt, mortgages). – Ben Miller Jul 01 '23 at 09:26
  • @ronjohn Provide proof of your statement that nobody accepts math without proof. – barbecue Jul 01 '23 at 17:50
  • @barbecue "nobody accepts math without proof" is manifestly not what I wrote. – RonJohn Jul 01 '23 at 19:00
  • If you were using the avalanche method you were already putting your not-freed cash flow towards debt anyway. – user253751 Jul 02 '23 at 17:41
  • @RonJohn I hoped that if the math was incontrovertible, answerers on this site would not gainsay it. (I was wrong, as it happens.) – HAEM Jul 02 '23 at 18:54
  • @HAEM the full answer is "Avalanche is quicker". Every other word on this page is a waste of ASCII. :) Some of the folks on here telling you "Avalanche is quicker" are literally quant mathematicians or the people who program the software that makes money exist. "Avalanche is quicker" – Fattie Jul 03 '23 at 00:23
  • @HAEM the math is incontrovertible. Open a spreadsheet and model the two methods yourself, to see. The “problem” is that humans are not automatons who only and always choose the logical/rational approach. – RonJohn Jul 03 '23 at 00:37

11 Answers11

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Mathematically, if you apply the same total capital to debt (meaning you take the additional cashflow after paying off a debt and apply it to the next one), avalanche will always result in less interest paid because you're paying down higher-interest rate debt first.

But that requires that the total capital that goes to debt (total of principal and interest) is the same in both cases until the debt is paid off. The main argument I (and others) use for snowball is the psychological benefit of getting smaller balances out of the way and focusing more energy on ones that can be paid off in a shorter time frame. For some (not everyone), that momentum and sense of accomplishment can actually accelerate (or at least not slow down) the debt payment and can (again, in some cases, not all) reduce the amount of interest paid. Plus you risk making mistakes by having lots of loans lingering, like missing a payment, which adds late fees that could completely negate the interest savings, instead of just knocking out the small ones, freeing up the cash flow and getting them off your radar.

Yes, if you have the financial discipline to consistently keep chipping away at the highest rate debt, then you will pay less interest. But depending on the amount of debt, the difference in interest is not as significant as the amount of debt actually paid off.

Many here will argue that finances shouldn't be driven by feelings, and that's fine - but personal finance in my experience is MUCH more about behavior than mathematics, so it seems reasonable to me to focus more on behavior that works rather then the "optimal" path that may or may not lose momentum without some sense of progress along the way.

D Stanley
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  • I assume you mean in your third paragraph "to keep chipping away at the highest rate debt" – Justin Cave Jun 29 '23 at 19:58
  • @JustinCave Thanks - fixed. – D Stanley Jun 29 '23 at 20:04
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    From a quick search the average credit card interest rate is about 24% currently and average credit card debt in the US is over $7k. If the interest rates don't vary too much then maybe it's worth paying off a lower rate first, but it's unconscionable to recommend the snowball method to someone with significant credit card debt. – Hart CO Jun 30 '23 at 02:50
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    @HartCO If they have genuinely significant credit card debt, then you can roll all the high-interest debt into a lower interest loan, and pay that off instead, but that's changing the interest rate, which has all sorts of other traps, like... freeing up your credit for even more debt. – Nelson Jun 30 '23 at 06:00
  • You should be more explicit about what you mean by "accelerate (or at least not slow down) the debt payment". -- I'm assuming you're not saying there's a magic financial trick which increases your debt payments while simultaneously increasing your free cashflow when you close a debt. Instead, I'm guessing that you're implying that, because you're excited about paying off your debt, you commit a larger absolute fraction of your income to debt repayment (or at least, you're less likely to take money out of debt repayment and put it into discretionary spending.) – R.M. Jun 30 '23 at 12:56
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    @HartCO That's very fair and I actually would suggest paying off higher-rate cards first in some cases if the interest savings were more significant. Usually what I see is people being pedantic the other way - focusing on a large 5% student loan for years while letting a small 4% retail loan linger just because "the math says so". – D Stanley Jun 30 '23 at 14:10
  • @Nelson Certainly, evaluating potential for reducing interest rates is something people should look into, but many people with substantial credit card debt do not have great alternatives to reduce rate. My point is just that snowball method shouldn't be recommended without evaluating the individual's situation, making caveats for high rates, or at explaining the cost versus a more efficient approach. – Hart CO Jun 30 '23 at 16:10
  • @DStanley What issue do you see with letting the small4% loan lingering. Assuming all the minimum payments are made on time, I'm not sure what's 'pedantic' about it. – JimmyJames Jun 30 '23 at 17:45
  • Downvoted because this is terrible advice that is harmful to anyone who follows it. First, do no harm. – Nobody Jun 30 '23 at 18:08
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    @JimmyJames: From my experience: cash flow/payment safety. Those who are in problematic debt situations rarely have savings or financial fall backs in case of any issues arising, be they external or internal. And missing a payment can have significant draw backs for them (e.g. late fees, as well as additional interest2, or other penalties such as eviction or repossession), which can lead to even bigger issues. Closing out a small loan, and eliminating a mandatory payment can increase flexibility if done right (e.g. more money for other loans, effectively a small "transitive" emergency fund). – sharur Jun 30 '23 at 21:18
  • @JimmyJames I don't have an issue with it, I'm saying that there are some non-mathematical benefits to getting smaller debts out of the way. The discipline and regular cash flow to attain the optimal path aren't always realistic. – D Stanley Jun 30 '23 at 21:28
  • @DStanley Cash flow is a real and very mathematical concept which is often overlooked. Maybe that's what you need to emphasize in this answer. Debt consolidation is also a way to address that. As I look back on how I climbed out of (fairly significant) debt, one of the most effective tools was using 0% APR offers. There was a initial cost to them but they allowed me to move my highest interest debt into a 'holding pen' while I eliminated lower interest rate debt (often 0% as well.) I'm not sure that's an option these days. – JimmyJames Jun 30 '23 at 21:52
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    @JimmyJames And that's a perfectly valid scenario. What worked for me was focusing on the "annoying" small debts by getting rid of them, cutting spending to the bone, and working on knocking the smallest debts first. None of them were high interest cards, so I didn't minimize interest but the difference was not significant compared to the momentum of "getting things done". If instead I focused on the largest rate debt (student loan by a small amount) and let the smaller rate debts linger, I'm not sure I would have had the same motivation. – D Stanley Jun 30 '23 at 21:58
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    Again, I'm not saying that snowball is always better (in fact I concede that avalanche is better when considering the math only), but I strongly disagree with saying that avalanche is always better when you consider behavior and momentum. – D Stanley Jun 30 '23 at 21:58
  • And I've had this same argument on dozens of answers that end up getting highly voted, so I'm pretty sure I'm not in the minority... – D Stanley Jun 30 '23 at 22:01
  • For the past 15+ years, it’s been “impossible” (except for the occasional bank computer error) to miss a payment, no matter how many loans you have. – RonJohn Jul 01 '23 at 05:11
  • "traps, like... freeing up your credit for even more debt." You need discipline to get out of debt. Thus, if you really want to get out of debt, you'll use balance transfer offers to pay debt faster. – RonJohn Jul 01 '23 at 19:08
  • I would caution that on a specific QA which is asking a mathematical question, it is dangerous to write at length about unrelated issues. Note that indeed the unrelated issues could be colored by this textual event. This answer is essentially "wrong" formulaically (the answer on this page has one word, being "avalanche"); thus - as sure as night follows day - someone, somewhere, will one day write "yeah, that guy was singing the praises of snowball, and look, the answer is wrong ..." – Fattie Jul 03 '23 at 00:28
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Barring some edge-case complications (see below), debt size is a non-factor in the math of efficient debt repayment. Having a $100,000 loan at 5% is equivalent to having a hundred $1,000 loans at 5%.

Each dollar of debt at 5% costs you $0.05/year (simple interest). Each dollar of debt at 8% interest costs you $0.08/year. How much debt you have at each rate doesn't matter, all that matters is that for each extra dollar you can put to the 8% debt instead of the 5% debt you save $0.03 in interest/year. Conversely, each dollar extra you pay towards a 5% debt while you have an 8% debt outstanding costs you $0.03/year.

If you have extra money and you have a savings account (1% interest) and a high-yield savings account (4% interest) then you'd put your extra in the account that earns you more interest, because you want the most benefit for each extra dollar. With debt, you're the one paying the interest so the most benefit comes from paying off the highest rate first.

I have repaid a significant amount of debt and always put extra toward highest rate first, I don't feel the snowball approach offers significant psychological advantage but it's popular for a reason. I think viewing debt as one big pile and focusing on best use for each dollar, watching the pile decrease at a faster rate is better for anyone who has decent financial health/discipline.

Some common complications that may affect repayment approach:

  • Tax deductible interest (should calculate 'effective' interest rate after tax benefit for repayment decisions)
  • Pre-payment penalties
  • Variable rates
Hart CO
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  • Keep in mind that tax-deductible interest might not matter in many situations (eg., the US has several scenarios in which actually deducting interest might result in a higher tax burden). Tax-deductibility is a factor, but be sure that you should deduct the interest given the rest of your tax scenario. – minnmass Jul 01 '23 at 03:26
  • @minnmass Yep, that's why I said you'd calculate effective interest rate after tax benefit, if there's no tax benefit then the effective rate is the interest rate with nothing else to figure. Takes a good bit extra figuring since all the itemization up to the standard deduction only serves to enable deductions beyond that point. Kind of nice that it's a non-issue for most people now. – Hart CO Jul 01 '23 at 04:29
  • The only thing I think I'd comment here is that snowball may be more effective when someone is not good at keeping track of payments - if you keep missing payments and getting charged fees, getting rid of small debts might be beneficial. Otherwise, yeah, highest interest first is always going to come out ahead – lupe Jul 02 '23 at 20:54
  • @lupe Agreed, if you struggle to make required payments then there are bigger issues to address before efficient use of extra payments. – Hart CO Jul 03 '23 at 14:54
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The theory of freeing up cash flow doesn't work, as well elaborated. There is however one small advantage to the snowball method.

Besides the interest cost, there's a transactional cost to every debt. The time you spend tracking it, budgeting for it, and making the payments.

The snowball approach provides the lowest transactional cost, i.e. the least time spent tracking and repaying the debts. Its monetary cost will however be at best the same (if all debts have the same rate) or higher.

In practice, the snowball approach isn't terrible, because the largest loans, like a home mortgage, tend to have lower interest rates. Smaller ones like payday loans tend to have the highest rates, since the lender also faces transactional costs and risks. (This applies to personal finance; in business lending, it can be reversed.) In some cases both approaches will give the same repayment schedule.

Snowball is never cheaper (unless there are transfer fees, which isn't normal). It's never faster for getting to zero debt. But it can save some personal time if there's a lot of small debts that have to be managed separately.

Even in that case, it's more sensible to mix the approaches, e.g. clear debts under some "nuisance level" like $100 right away, then sort larger debts in terms of highest APR paid first.

Therac
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    Perfect answer and the only one to bring up that pure dollar value isn't the only type of "cost" one can optimize for – Hobbamok Jun 30 '23 at 13:11
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    I'm sorry, but this is nonsense. How much of a cost do you really think tracking the balance and payments on a single loan amounts to, particularly these days when you can set up an automatic payment every month? It is ludicrous to suggest that someone should pay real costs in extra interest to save on the intangible cost of clicking a "confirm payment" button one extra time per month. – Nobody Jun 30 '23 at 18:16
  • @Nobody At $7.25/hour value of time, assuming 2 minutes/month to track and 2 minutes to pay, a 12-month $100 debt at 5% APR will cost $2.73 in interest and $5.8 in the time cost of tracking and making monthly payments. – Therac Jun 30 '23 at 18:55
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    @Therac The cost of the interest scales with the size of the debt; the cost of your 4 minutes per month does not. Try the math again with a more realistic size for the principal. – Nobody Jun 30 '23 at 19:31
  • @Therac If - and only if - you can, without spending any extra overhead time, find an extra 2 minutes of employment per month – njzk2 Jun 30 '23 at 20:31
  • @Nobody This is specifically the kind of debt one would start with in snowball. I'm not advocating for it, but suggesting it's not totally without merit. – Therac Jul 01 '23 at 02:12
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    @njzk2 The illiquidity of small amounts of time cuts both ways: suppose you're short a few minutes on the payment day, and slip the deadline by just a bit... The odds of that are higher with 100 debts than with 10. – Therac Jul 01 '23 at 02:51
  • It’s 2023, not 2003: Computers greatly reduce the transaction cost of debts, since you tell your bank’s website once to pay $X to each debtor, only modifying one when a debit is cleared. (But even in 2003 there were computer bill pay services that would mail checks for you.) – RonJohn Jul 01 '23 at 05:18
  • @RonJohn Even as of 2023, that's only a desired situation. With a lot of various debts, some lenders might only take cash, some will need different kinds of transfers, some have to be paid from a business account, some debts are in other countries. Add variable income, so this month you can make the minimums, next month you'll be late on some, a month after have a windfall to clear some altogether. I'm not saying it's normal, but a heavily indebted person can have a much more complicated situation than a few monthly card payments. – Therac Jul 01 '23 at 06:14
  • @Therac if you’re robbing Peter to pay Paul, then you’re in worse trouble than what either the avalanche or snowball can fix. – RonJohn Jul 01 '23 at 08:22
  • @RonJohn It's not common in the US/EU due to relatively common use of bankruptcy, but I've been in countries where it's pretty common to tier lenders and borrow from friends and family to cover the most dangerous debts. That is most definitely not a "set a monthly payment and forgetaboutit" situation. – Therac Jul 01 '23 at 08:29
  • @Therac that’s pretty much what I said. – RonJohn Jul 01 '23 at 08:32
  • @RonJohn That's exactly a situation where a mixed approach is best: use "snowball" to clear very small debts (recovering your lending ability), while addressing the highest-penalty debts as priority (safety), with highest-interest debts second. – Therac Jul 01 '23 at 08:42
  • So many absolutist comments declaring that there's only one correct approach for all humans. That's never true. Not ever. – barbecue Jul 01 '23 at 17:43
  • @barbecue and all the rest of the gang. OP is not asking a general philosophical question; is not asking the open ended question "which is best"; is not asking for marriage advice; is not asking about sleep hygiene. OP is asking the question in the title. – Fattie Jul 03 '23 at 00:31
  • It's theoretically astute to point out that theoretically there could be fees for each payment. Bravo. However the OP can instantly see that (in the actual world) fees are zero, and, they would have to be astounding/bizarre to affect such a calculation, and even if such fees existed you'd just be calculating it as part of the "effective interest". Regarding the personal time cost, sure, in some absolutely incredibly obscure case, randomly valuing the $/hour at some amount, you could say one or the other is more expensive. None of this answers the question in the headline. – Fattie Jul 03 '23 at 00:36
  • @Fattie the problem is that there are plenty of people who are not mentally capable of handling many small debts, and who are not capable of adding any cost as "effective interest". Especially among people who have a lot of debt. – gnasher729 Jul 03 '23 at 00:58
  • @fattie My comment was referring to other comments. Not sure why you think I was attempting to answer the question in a comment. – barbecue Jul 03 '23 at 01:49
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When someone reaches the stage of needing to have "a method" for paying off debt then that is usually because they have reached a state of being heavily indebted. Of having a debt repayment burden that is negatively affecting their quality of life.

The main advantage of the snowball method is that it more rapidly frees up income. That income can then be used to avoid needing to go further into debt by covering emergencies and daily living expenses. So you more rapidly reach the state of having comfortable levels of debt.

At the end of the process, yes, you'll not have as much money as in the avalanche method but it may take many years to clear your debt. For many people, the important thing is to get from the state where paying back debt is negatively affecting quality of life to the state where it isn't as quickly as possible.

If, on the other hand, you're already in the position of being financially comfortable but are just looking to manage your debts in a way that works out best in the long run then the avalanche method is always the right choice.

Jack Aidley
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  • Good point, individual situations really drive appropriate strategy, debt snowball seems best suited for those that are in rough shape financially. I'd argue though, that anyone with debt should have a strategy/plan. Even if someone just has a mortgage they should consider if it's worth paying extra vs the minimum. – Hart CO Jun 30 '23 at 16:30
  • @HartCO I guess it depends on how loosely you interpret the idea of having "a method" to pay off debt. I think people should look seriously at their finances from time to time, and certainly consider the long term impact of paying extra on a mortgage for example. But I wouldn't call that "a method". – Jack Aidley Jul 01 '23 at 07:08
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    This is the best answer in this whole thread. It's the only answer which really convinced me that for some people, in some circumstances, snowball is absolutely the best approach mathematically (and not just physiologically), because they really need the extra income to stabilise their life financially and possibly prevent themselves going further into debt because minimum payments meant they didn't have enough left over to live. – niemiro Jul 01 '23 at 21:52
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The money "freed up" by the snowball method was already being used to pay down debts.

Ie, imagine you have a pair of debts:

10k at 1% per month; min payment 200$

1k at 0.1% per month; min payment 100$

Free cash flow of 100$ (and 300$ which you are using to pay off the two debts; if you fail to make min payment, you get penalized harshly).

Snowball says "pay off the 1k debt first, as it is the smallest". And it is true that after paying off the 1k debt, you now have 200$ in cash flow.

But that min payment on the 1k isn't "lost money", it is being used to pay off a debt already. You are forced (by the min payment rules) to put it against the lower interest debt, but putting more money into the lower interest debt isn't the optimal solution.

Instead, you throw the 100$ at the larger 10k debt. Every 100$ you throw at it reduces its interest by 1$ per month, while 100$ thrown at the 1k debt lowers its interest by 0.1$ per month.

While it takes longer to clear a debt this way, you end up with more money at the end of the process.

You can flip everything on its head. Imagine if instead of debt, you had 2 investment chances. One can soak up to 1k, and returns 0.1% per month in yield. The other can soak up to 10k, and returns 1% per month in yield.

The second is clearly a better investment option.

High interest debt is toxic.

There are real advantages to snowball beyond the psychological.

  1. Every debt requires effort to keep track off. Fewer debt, less tracking load.

  2. Free cash flow can help avoid adding more debt, and min payments aren't usually linear. By clearing a debt completely, you can maybe avoid having to borrow to handle unanticipated problems.

  3. If you do need to renegotiate or whatever, fewer counter parties makes such renegotiation easier. Like, if you owe 1k to 10 people, getting a 1 month delay on payments requires 10 different deals. If you owe 10k to 1 person, getting a 1 month delay on payments requires 1 deal.

and the psychological boost can be real (victory! instead of a battle of attrition).

And for most human endevours, motivation and psychology is insanely important.

Some people can be motivated by the math of the avalanche, and how they are smarter and doing it optimally than the "easy win of snowball". But often the snowball is pretty damn close to avalanche in costs, and doesn't require fancy tricks to convince yourself you are winning.

On the other hand, an annual 30% interest debt is insanely worse than a 5% interest debt. If the difference is 16% and 15%, go snowball the smaller one -- if the difference is huge, focus on the one that really matters, the big interest one.

Yakk
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First you check if there are any rules beyond just interest payments. Credit card debt in the Uk, you often have high interest rate if you just make minimum payments and a lower rate if you pay off more, so you want to pay enough to get the lower interest rate. Or shops give you “interest free credit” for two years with huge penalties if you don’t pay back in time. Make sure you don’t fall into any traps.

Apart from that, paying the highest interest loan first will be most effective. So the “snowball” method isn’t going to win. It’s psychological only. If you use snowball and continue paying back debt, that’s a lot better than using avalanche and giving up.

And use some common sense. If you owe $1000 at 15.1% and $20,000 at 15.3% then by all means pay back the $1000 first. If the $1000 are at 3% then don’t. Or pay back a $100 debt to get it out of the way, no matter what the interest rate is.

gnasher729
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I actually wrote a python script (pastebin link) to simulate the two methods. The capital, minimum installment and interest are randomized independently and the interest is compounded monthly, but the results point to a fairly obvious answer.

On average, even when accounting for the freed up cash flow, the avalanche method is cheaper by around 1% of the capital, and the distribution is skewed towards avalanche being cheaper. There's hardly any difference in total payment time, with the average being about half a month in avalanche's favor.

With that, I feel confident in saying that the avalanche method is indeed superior barring edge cases.

HAEM
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  • @NuclearHoagie I think the trick is that with snowball you have more disposable income to put towards clearing the debt that can, in a scenario that's just about purpose built for it, get a better outcome from snowball. – HAEM Jun 29 '23 at 18:36
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    No - if you have the same total capital to put towards debt, avalanche always minimizes the interest paid. Snowball doesn't change the math, it (in some cases) changes the behavior. – D Stanley Jun 29 '23 at 18:41
  • @DStanley would you mind giving my math a once over, if you can see where I got it wrong? – HAEM Jun 29 '23 at 18:48
  • I don't have access to the code, but are you keeping the total capital constant and just putting all of the excess (above the minimum payments) to the highest rate/lowest balance first? – D Stanley Jun 29 '23 at 18:52
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    @HAEM No, the premise is that you have $X each month to allocate to your debt however you want. Once you've paid off the low-interest snowball debt, you just switch to putting that $X to the higher-interest debt. Paying off the low interest debt doesn't give you any more disposable income to pay off your loans, you still only have $X to spend each month. You don't now have $X+$Y to spend on debt after the smaller debt is gone. – Nuclear Hoagie Jun 29 '23 at 18:56
  • @NuclearHoagie I'm not sure if that is the premise at all; The simulation I run starts with exactly zero dollars to be freely allocated, and paying off each debt adds the monthly minimum to the sum of money that can be freely allocated. I believe this lets snowball squeeze by avalanche. But, we are talking about a very rare occurrence that can be wiped out by a change in interest rates. – HAEM Jun 29 '23 at 20:53
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    @HAEM It should be clear that snowball cannot be cheaper (it's a psychological trick), so your script cannot work correctly. A quick glance suggested at least 2 potential bugs: 1) if sn_tot <= av_tot: counts snowball as a win even if they are just equal (e.g. if they accidently pay in the same order) and/or have a floating point difference (e.g. summing in the 12th digit may not be exact) 2) in simulate_paying, if remainder > 0 and last >= 0: seems to only pay off one remaining debt. If there's a remainder after that single payment, it won't get used, same for the initial lump sum. – Solarflare Jun 29 '23 at 23:20
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    @Solarflare Thanks. Fixing those made the snowball wins go away. – HAEM Jun 30 '23 at 06:09
  • @HAEM Finishing paying one debt just means you can take money you spent on that debt and apply it to another one, not that you now have more money total to spend on debt. Suppose you make $100/month and spend all of it clearing a low-interest debt - you can now spend that $100 elsewhere, but it's of course impossible for you to ever spend more than $100/month on anything at all, since you don't make that much. There is some fixed pool of spendable cash, the only thing that changes is which debt you you spend it on. – Nuclear Hoagie Jun 30 '23 at 12:24
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    @NuclearHoagie Most debts come with either a min payment or an amortized payment requirement. Clearing a debt clears that min payment/amortized payment, which is what HAEM is confused by. You have 100$ disposable and 300$ you are paying in debt payments (if you fail to keep up you get penalties). So you clear a debt and its 50$/month in required payments is freed up, giving you 150$. The error here is that the 50$/month was already being paid to a debt, it isn't "real" additional debt payments. – Yakk Jun 30 '23 at 14:46
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An entity acting on pure reason, such as an organization with a board of directors of competent investment banker types, will never choose "snowball" unless there is a business incentive to do so (e.g. something wacky about contract terms). Avalanche is the most prudent and dollar-efficient method.

The "snowball" method is an emotional tool. It is based on the premise that the smallest debt is probably smaller than the highest-interest debt, so you will sooner achieve the "contact high" and sense of accomplishment of crossing one off. That can be important to motivate some people to stay in it for the long haul.

I cannot quantify the value of that emotion.

I might say that making emotion based decisions in lieu of a financial education is what got a lot of debtors into trouble in the first place! So I don't think replacing "emotion" with "other emotion" is the right play, better to replace it with "financial education". E.G. Buying a house (on a mortgage) may be more rational than renting. Fueling and maintaining an old "beater" car may be less wise than financing an EV. Oh boy, here come the downvotes :)

Unfortunately, some financial advisors recommend snowball on a one-size-fits-all basis, believing the emotion benefits everyone equally, and that indebtedness only arises from lack of financial education. I wouldn't say so. Nor would I say lack of financial education can't be corrected. I might even call it a financial advisor's job :) I'm in trouble now :)

Harper - Reinstate Monica
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Why does the snowball method work? The answer is behavioral, not mathematical. As much as we like to think we are driven solely by logic, very few of us are.

Here is a simple example that explains how debt snowball can be superior.

Lets say one has two debts:

  • 6K @ 14% interest
  • 300 @ 0% interest

You have an extra $350 this month after paying minimums on both debts. However, there is a sporting event you would like to go in a week's time. Ticket cost: $300.

If one were to use the avalanche method, they would pay on the larger loan. However, reducing the loan by a relatively small amount does not generate a lot of pleasure.

Going to the sporting event generates a lot of pleasure, and they would need the extra 50 (or more) for parking, drinks and food. I would argue that most avalanchers would tend to choose the sporting event. This would quite possibly leave them in a worse situation as they may spend more than 50 on other associated costs.

The snowballer is left with a choice. Go to the sporting event or pay off the debt and have $50 left over. A likely choice is for this person to pay off the debt, and use the 50 to go out and watch the game at a pub or something.

And this is really the crux of debt pay off: small choices that leads to big change. Paying of debt is not fun. It is hard to stay motivated. Seeing large loans decrease by small amounts is underwhelming. Seeing debts crossed off your list is much more motivating.

And I will ask the obvious question. If one is so logical, why now the need to pay down debt?

Even though I am a bit of a math guy, I made many bad choices that lead to excess spending and bad debt. These were emotional although I'd like to think they weren't. For me the snowball method worked, and I assert that it will work well for most people.

Pete B.
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  • Needs evidence (not anecdotes) that people who reduce debt via snowball don’t actually reduce debt, but instead are actually crypto-spendthrifts. – RonJohn Jul 05 '23 at 23:40
  • @RonJohn the evidence is pretty obvious. How many people actually transition from being into consumer debt to having none? I would assert very few. There are the disciplined that never get in consumer debt in the first place (or well within their income) and those that remain living from paycheck to paycheck. Actually getting out of debt is weird. – Pete B. Jul 06 '23 at 14:08
  • We were $30K in CC debt (plus auto and mortgage) and dug our way out with alternating snowball and avalanche methods, so must be weird. – RonJohn Jul 06 '23 at 17:59
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I call my method the "zombie killing" method.

Each debt is a zombie, advancing towards you. Each zombie requires X bullets per unit time (say, per month) to keep it at bay. Each month, I have just so many bullets.

For each zombie, if X is the bullets required to keep it at bay this month, Y is the bullets needed to kill it so it doesn't get up ever again.

The more bullets I have each month, the easier it is to keep zombies at bay, the faster I kill them, the less stressed I am.

So I want the technique which frees up, or allows me to allocate, more and more bullets.

So I concentrate on the easiest-to-kill zombie, defined as the most X for the least Y bullets.

For example,

  • Zombie A needs 50 bullets per month to keep at bay, and 2000 bullets to kill = ratio 40
  • Zombie B needs 100 bullets per month to keep at bay, and 10000 bullets to kill = ratio 100
  • Zombie C needs 75 bullets per month to keep at bay, and 2500 bullets to kill = ratio 33.3

I'm going to concentrate on killing zombie C first. It's harder to kill than zombie A, but once it is dead, I get more bullets per month to kill the others.

I kill zombie A next. At the end I'm killing zombie B with 225 bullets per month, which is more than twice the kill rate, if I took it on first.

This method has the advantage of being far more exciting.

Stewart
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    You just rephrased the snowball method – Hobbamok Jun 30 '23 at 13:13
  • @Hobbamok The OP said snowball was where "you put your extra money towards the smallest debt". Which in the example above would be debt A, but I recommend tackling debt C first. – Stewart Jun 30 '23 at 13:46
  • I can see that finance people really really don't like zombies or storytelling. – Stewart Jun 30 '23 at 13:46
  • @Hobbamok It's not the snowball method, it's ratio of minimum payment to balance, the example has 'C' going first despite higher balance than A. – Hart CO Jun 30 '23 at 16:32
  • Stewart, I think this approach is fun, but it's not wise to ignore interest rates. Credit cards often have very high interest rates and very low minimum payments. This approach doesn't add any efficiency to debt-repayment but it is fun, and sometimes adding a little fun can make doing a hard thing easier. Instead of individual zombies, each debt could be a horde of zombies and interest rate is how fast the horde is growing in size. – Hart CO Jun 30 '23 at 16:41
  • @HartCO That's a great addition to this method! TBH, I think efficiency is overrated. I think effectiveness is far more important. Using this method I zero'd my debt with enthusiasm. I enjoyed the satisfaction of closing loans and credit cards. The pleasure I got from saying, "I used to have 5 cards and 2 loans. Now I only have 2 cards." Prior to that, I'd never got a grip on it before. – Stewart Jun 30 '23 at 16:41
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    @Stewart Agreed for the most part, efficiency is mostly an issue when there are significant differences in interest rate. Watching a $10k credit card balance balloon due to crazy interest rate while knocking down the remainder of a smaller loan with a lower rate could easily derail someone. Congrats on your progress too! – Hart CO Jun 30 '23 at 17:02
  • @HartCO You make a good point – Stewart Jun 30 '23 at 22:05
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    Some pretty dumb downvotes on this. – barbecue Jul 01 '23 at 17:47
  • @barbecue the answer doesn't explain the method particularly well, frames it in an odd narrative, and doesn't provide a good reason for why this method should be used. Also, it isn't relevant to the question. – HAEM Jul 02 '23 at 13:10
  • @HAEM All 4 of those points are open to debate. Alternatively, I choose to take your critique as a compliment. ;) – Stewart Jul 02 '23 at 20:39
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    @HAEM Any method that ignores the psychological aspect is inadequate for the majority of people. Most people in debt are not math nerds. – barbecue Jul 03 '23 at 01:46
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    Are the bullets the minimum payments? – RonJohn Jul 05 '23 at 23:44
  • @RonJohn Bullets are cash - GBP or USD, etc. The minimum payment is the number of bullets to keep the zombie "at bay" - to push him back until next month. – Stewart Jul 06 '23 at 15:48
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    What makes the ratio method better than avalanche? – RonJohn Jul 06 '23 at 18:04
  • @RonJohn You free up more "bullets" faster, for least cost of "total kill". The more freed up bullets, the more freedom of choice (control) you have in your cashflow & spending. – Stewart Jul 06 '23 at 19:37
  • @RonJohn In the example above, there's not much to choose between zombies A and C. But C is better because for a mere 500 kill price, you get back 25 extra per month, compared with A. – Stewart Jul 06 '23 at 19:39
  • You'll need to provide a spreadsheet demonstrating that this scheme works no matter the interest rate variations. – RonJohn Jul 07 '23 at 03:27
  • @RonJohn Ha ha! You're funny! First, define "works". 2nd, why do I have to? You're not my boss. I know this works for me. I offered it in the spirit of help. What I have learned is that finance people are a miserable bunch. They don't believe in help. They don't like good stories. They have zero idea how the human mind works. And that being criticised by a finance person is a compliment. – Stewart Jul 07 '23 at 12:35
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    Maybe the Zombie method is better. Or at least As Good As. But we're not going to believe you just because you say so. – RonJohn Jul 07 '23 at 14:21
  • @RonJohn I don't expect you to. If it looks interesting to you, you'll think it over and decide for yourself. For me, it was empowering. My debt with the largest interest was also the largest amount to pay off. Would have taken forever. But others were easy to kill off, while releasing a large chunk of cashflow each month (cash not required on a minimum payment). Also, there was the win of having a closing statement with ZERO written on it. Meanwhile, I have learned to avoid internet conversations where someone demands, "Prove it!" How do I even upload a spreadsheet here anyway ? – Stewart Jul 07 '23 at 18:20
  • "My debt with the largest interest was also the largest amount to pay off. Would have taken forever. But others were easy to kill off". Paying off the lowest balances first is... drum roll, please... the snowball method. Whether you know it or not, whether you admit it or not, you performed a variation on the snowball method. – RonJohn Jul 07 '23 at 19:05
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None of them.

My method.

  1. check how much money can spend for pay off
  2. calculate intrest rate for every debt
  3. calculate commision refund if pay off debt
  4. calculate commision refund if use previous commision refund to pay off
  5. repeat 4 until commision refund is negligible
  6. repeat calculations from points 3-5 for all debts
  7. choose to repay this debt after wich my total monthly intrest is the lowest.

Example:

  1. 50k total taken, commision 6k, intrest 20%, 5y total 4y left
  2. 100k total taken, commision 20k, intrest 20%, 10y total 9y left
  3. 300k total taken, commision 30k, intrest 10%, 30y total 22y left

To pay of first is 2. - every 10k is 2k commision refund wich means 10k pays around 12,5k.

k_z
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